There is no official definition of recession, but there is general recognition that the term refers to a period of decline in economic activity [1]. Recession is a period when economic output contracts for 2 straight quarters. Kristalina Georgieva, Managing Director of the International Monetary Fund, says the world economy is that could be worse than the 2009 downturn [2].
However, according to National Bureau of Economic Research, ‘a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough’
Factors affecting recession
There are a variety of reasons recessions take place. Some are associated with:
- Sharp changes in the prices of the inputs used in producing goods and services.
- Decline in external demand, especially in countries with strong export sectors.
Characteristics of recession
Although each recession has unique features, recessions often exhibit a number of common characteristics such as follows:
- Typically last about 1 year and often result in a significant output cost. In particular, a recession is usually associated with a decline of 2% in GDP. In the case of severe recessions, the typical output cost is close to 5%
- Fall in consumption is often small
- Both industrial production and investment register much larger declines than that in GDP
- Typically overlap with drops in international trade as exports and, especially, imports fall sharply during periods of slowdown
- Unemployment rate almost always jumps
- Inflation falls slightly because overall demand for goods and services is curtailed
- Along with the erosion of house and equity values, recessions tend to be associated with turmoil in financial markets
What is the differences between recession and depression?
There is no formal definition of depression, but most analysts consider a depression to be an extremely severe recession in which the decline in GDP exceeds 10%.
Pattern of recession
Whether economies can avoid the recession or not, the path back to growth under Covid-19 will depend on a range of drivers, such as the degree to which demand will be delayed or foregone, whether the shock is truly a spike or lasts, or whether there is structural damage, among other factors. It’s reasonable to sketch three broad scenarios, which we described as V-U-L [3]
Baa’ is the new shape
The letters V and W, with their sharp bounces, and mean reversion assumptions, seem to belong to a 1945-2007 world, a prior era compared to post-2008 structural trends. U seems to ignore 10 years of lower growth and rates. The letter L seems more suited for Japan. Instead, the Arabic letter Baa’ is a suitable illustration of the projected recovery for COVID-19 [4]
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