Recession is a broad economic downturn that typically entails a significant decline in a country’s real gross domestic product (GDP). A common definition of recession focuses on two consecutive quarters of GDP decline. However, many economists also use a range of other indicators to evaluate economic health and identify when a country may be entering a recession.
When a recession starts, the economy often experiences a series of negative chain reactions that slow down and eventually derail economic activity. For example, as household spending and investment decline, companies may begin to reduce production or lay off workers. This can further reduce consumer spending, and lead to additional business failures. Over time, this can cause the economy to spiral downward into a deeper and longer recession.
Recession effects can also be caused by external factors that affect global demand for products and services. For example, a geopolitical conflict, natural disaster, or pandemic can wreak havoc on supply chains, increase prices, and stall production. This can impact both global consumption and trade, which in turn can have a negative effect on the local economy.
The declines in economic output that accompany recessions can have widespread and lasting consequences for all members of society. People who lose their jobs experience diminished income, and this can limit opportunities for education, training, career advancement, and social mobility. In addition, businesses and institutions that are forced to close due to reduced revenue must retrain staff and replace equipment, which further limits their ability to hire new workers.