The definition of recession, according to the RAE, is a “depression of economic activities in general that tends to be passenger.” But if we attend to the pure meaning of economic recession, the concept accepted by the majority of experts is the one defined by economist Julius Shiskin in The New York Times.
The definition published by this economist in 1974 refers to the evolution of the interannual rate of the Gross Domestic Product (GDP), considering that the economy of the country in question has entered into recession when 2 consecutive quarters of GDP are recorded in negative.
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How do you know if a country has entered recession?
Once the definition of economic recession is clear, it is also important to know what are the economic indicators of a recession. That is, what indications make us know that a country has entered into recession, either because they are repeated as a pattern or what they mean for the economy of the place. Funcas, in a work published in 2020, analyzes “what are the most influential economic indicators to predict recessions in Spain.” In this analysis, we must highlight:
“Throughout the period (1971-2020), among the best indicators to predict the recessions are the advanced indicators of GDP and car sales trend, and the registered strike. The ability to anticipate recessions increases when the indicators of trust, stock markets and interest rates are added,” they say from this economic information analysis center.
“In the great recession, the construction indicators and some financial related to the possession of deposits gained prominence. However, in the recession generated by the COVID-19, the production, unemployment and consumption indicators are the most important indicators, verifying the different economic foundations of those 2 recessions,” he adds.
What are the consequences of a recession?
As we have already seen, the main pillar on which an economic recession is sustained is the fall or worsening of GDP for 6 months in a row, so a thing is clear: in an economic recession there is a progressive decrease in the demand for goods and services.
There we have one of the main consequences of an economic recession, the fall in consumption, investment and production of goods and services. This, in turn, causes another indirect consequence, which is none other than the fall in employment.
Unemployment usually grows when an economic recession is already advanced, increasing the number of layoffs, collective layoffs and ERTE. With the decrease in production and demand for goods and services, companies need less personnel and end up reducing their templates.
For their part, changes in monetary policies of central banks are another common consequence of the recession, since they seek to fight against GDP and against inflation or deflation.
The recession, however, would be only a stage through which the economy continually passes, according to the theory of economic cycles, which collects the phases of expansion, recession, depression and recovery.
Differences between recession and inflation, depression or crisis
The recession, as we have seen before, is a sustained fall in economic activity, measured mainly by two consecutive quarters of GDP descent. Instead, inflation is the general increase in prices. According to the ECB (2023), in recession, inflation usually goes down, but can coexist, as happened with the energy crisis of 2022.
Economic depression is more serious than a recession: it implies prolonged and deep falls of GDP, massive bankruptcies and high unemployment. A historical example is the great depression of 1929, when industrial production collapsed and unemployment exceeded 25%, according to the Federal Reserve.
The term economic crisis is broader and may include recessions, depressions or episodes of extreme inflation. According to the IMF (2022), crises usually originate from financial imbalances, debt bubbles or external shocks. A recession can be part of a crisis, but not all crises lead to depressions.
Differentiating these concepts is key to apply appropriate economic policies. In minor recessions, interest rates to stimulate the economy are lowered. But if there is high inflation at the same time (stagflation), the response is more complex, as happened in the oil crisis of the 70s.