what is a recession?
A technical recession occurs when the level of real national output declines over two successive quarters causing a contraction in the total volume of production in the economy. But often a sharp slowdown in the rate of growth of output, spending and income can feel like a recession!
There have been five years of full-scale recession in the UK economy during the post-war period. The last recession occurred between 1990-92. Since then the economy has enjoyed the longest sustained growth of national output for over thirty years. Real GDP has increased for nine years in succession - and at the end of 2000, the UK economy has grown in size (in real terms) by over 20% from the low point (trough) of the last recession.
WHAT MIGHT CAUSE A RECESSION?
Recessions have a variety of causes and a wide range of symptoms.
Some causes are domestic in origin, stemming from policy mistakes on behalf of the economic authorities. For example, the central bank might allow the money supply to grow too slowly and keep interest rates above the level needed to maintain a steady rate of growth. Higher interest rates have the effect of dampening down spending by both households and businesses and can lead to plant closures and job losses.
External shocks can also bring about recession. For example in 1973-74 the large jump in world oil prices caused a sharp rise in cost push inflation and an acceleration in wages. Falling real purchasing power of consumers and a deflationary fiscal and monetary policy from the government sent the economy into reverse.
THE COSTS OF RECESSION
One of the ways of measuring the economic cost of a recession is the cumulative loss of national output. A recent study by the late Christopher Dow has calculate the lost output figures for the UK. These are shown in the chart below
SOME CHARACTERISTICS OF A RECESSION
- Declining demand for output leading to higher levels of spare productive capacity
- Contracting employment / rising unemployment as firms lay-off workers to control their costs (see the chart below)
- A sharp fall in business confidence & profits
- A decrease in fixed capital investment spending because there is insufficient demand to justify new capital projects
- De-stocking and heavy price discounting - this leads to lower inflation
- Reduced inflationary pressure in the labour market as unemployment rises
- Falling demand for imports
- Increased government borrowing
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