AS Macro Key Term: Double-Dip Recession

A double-dip recession happens when an economy goes into recession twice without having undergone a full recovery in between. There are several different possible causes of a double-dip recession:

Data from Timetric.

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United Kingdom Real GDP Change from Previous Year from Timetric

A double dip can occur for a variety of reasons including:

A fresh external economic shock: Industries involved in exporting goods and services are affected by a downturn in one or more of their major overseas export markets

Consumer confidence: There is a decline in consumer confidence which turns a fragile economic recovery into another contraction. Confidence might decline for a variety of reasons – for example a persistent fall in property prices, declining real disposable incomes or the effects of rising unemployment

Business confidence: There is a fall in business confidence leading to a fresh burst of production cut-backs and a fall in planned capital investment spending. One of the features of the recent recession in Europe has been the sharp decline in business and investor confidence – something that Keynesian economists know as a worsening of “animal spirits”.

Higher exchange rate: Recovery might be halted by an appreciation of the exchange rate which lowers a country’s international competitiveness –for example an appreciation of the Euro against the US dollar.

Policy mistakes - e.g. tightening of policy too soon: The withdrawal of a monetary and/or fiscal stimulus (e.g. higher interest rates, higher taxes and cuts in government spending) has the effect of causing a contraction of demand and production in the circular flow.

You might use an AD-AS analysis diagram to show a double-dip recession – illustrating for example an inward shift of the AD curve or a leftward shift in the short run aggregate supply curve.