Recession

A recession is a decline in aggregate economic activity. It is characterised by a decline in economic growth, wage growth, demand, wholesale and retail sales, corporate revenues and profits and rising unemployment.


Modern economies grow in alternate cycles of expansion and contraction, and the phase of contracting economic growth – from a growth peak to the next growth trough- is referred to as a recession. A popular definition of a recession is two successive quarters of negative growth in real GDP. In other words, an economy is technically considered to be in a recession if its inflation-adjusted GDP has shrunk for two quarters in a row. This definition is simple but flawed; because it does not take into account growth disparities between countries. Advanced economies tend to have lower growth rates (usually between 0% and 3%), so it is easier for them to fall into a technical recession. For example, Japan is growing at 0% to 1%, hence even a 1% drop in GDP growth can push it into recession; whereas, with an average growth of 6% to 7%, India needs a massive growth drop before it can be considered to be in a recession! That is the reason why many economists prefer to define recessions in terms of deviations from potential growth. A growth recession occurs when an economy grows below its long term trend growth rate for a meaningful period of time. Defined this way, a recession represents a cyclical decline in economic activity relative to its long term growth path. A mild and relatively brief recession is known as a slowdown; a deep and prolonged recession is called a depression.


Recessions are unpleasant periods, and often create social turmoil and political instability along with economic hardship. Governments usually adopt loose monetary policies to cope with a recession, hoping to stimulate demand through easy availability of credit and lower interest rates. Fiscal stimuli- such as reduced taxes, increases in civil service salaries, or higher welfare expenses- may also be used to push up economic activity.