A Recession is a downturn in the economy that can last from a few months to several years. It can be a significant setback for businesses and households, lowering living standards and causing unemployment. It can also impact state finances through reduced tax revenue and higher expenditures on social safety nets. Moreover, recessions can lead to a decrease in the value of a country’s currency.
Many factors can cause a recession, including unexpected shocks (wars or pandemics, for example) or industry collapses such as the housing market crash of 2008. In addition, if consumers cut spending more than companies cut investments, GDP will contract and growth will slow down. Often, the contraction leads to job losses and a drop in consumer confidence that makes people, companies, and governments hold on to their money even longer, further depressing economic activity.
The National Bureau of Economic Research (NBER) determines when a recession starts and ends, and uses a variety of metrics to assess the state of the economy. The most common metric is two consecutive quarters of negative GDP growth. However, NBER considers a number of other factors to ensure the downturn is deep and wide-spread enough to be considered a recession.
One key factor is monetary policy, where central banks can artificially suppress interest rates to try to stimulate economies. But this distorts financial markets, and when rates eventually rise to reflect real risks, they can make businesses, investment projects, and consumer decisions that are interest rate sensitive (such as mortgages or credit card debt) less attractive, which in turn can further reduce consumer spending and overall economic growth.