AS Macro Key Term: Recession

A recession is a hard-landing and means a fall in the level of real national output i.e. a period when the rate of growth is negative, leading to a contraction in employment, incomes and profits. There is in fact more than one definition and measurement of a recession.

The simple definition: A fall in real GDP for two consecutive quarters i.e. six months
The more detailed definition: A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Real GDP growth rate, United Kingdom from Timetric

After 16 years of growth, Britain dropped into recession in the second half of 2008. By the summer of 2009 UK GDP was already 5 per cent lower than the fourth quarter of 2007 - a recovery started in 2009 but growth has remained weak since then

There are many symptoms of a recession – here is a selection of twelve key indicators:

1. A fall in purchases of components and raw materials from supply-chain businesses
2. A fall in real national output (GDP)
3. Rising unemployment
4. A rise in the number of business failures
5. A decline in consumer and business confidence
6. A contraction in total consumer spending & a rise in the percentage of income saved
7. Falling business capital spending
8. A sharp drop in the value of exports and imports of goods and services
9. Deep price discounts offered by businesses
10. Heavy de-stocking as businesses look to cut unsold stocks when demand is weak
11. Government tax revenues are falling
12. The budget (fiscal) deficit is rising quickly

Real GDP growth for Greece

Real GDP growth rate, Greece from Timetric

A slump or a depression is a prolonged and deep recession leading to a significant fall in output and average living standards.

Recessions are unusual. To some economists they are an inevitable feature of a market economy because of the cyclical nature of output, demand and employment.

Every recession is different! It is undeniable that the global credit crunch has been hugely significant in causing the downturn even though macroeconomic policy has tried hard to prevent it.

The 2009 recession in the UK was the result of a combination of domestic and external economic factors and forces:

1. The end of the property boom – falling house prices hit wealth and led to a large contraction in new house building
2. Reductions in real disposable incomes due to wages rising less quickly than prices
3. The lagged effects of rising interest rates in 2007-08 (a tightening of monetary policy)
4. A sharp fall in consumer confidence – made worse by rising unemployment – leading to an increase in saving – Keynes called this the ‘paradox of thrift.’
5. External events – such as recession in the UK’s major trading partners including the USA (which accounts for 15% of UK trade) and the Euro Area (which has 55% of UK trade)
6. UK exports declined and this hit manufacturing industry hard
7. Cut-backs in production have led to a negative multiplier effect causing a decline in demand for consumer / household services and lower sales and profits for supply-chain businesses
8. The credit crunch caused the supply of credit to dry up affecting millions of businesses and home-owners
9. Falling profits and weaker demand caused a fall in business sector capital investment – known as the negative accelerator effect.
10. Unemployment started to rise early in the downturn – a reflection of our flexible labour market and sticky wages

An important evaluation point is that, in a recession, some businesses are affected more than others. The extent of the effects will depend on the type of business, the market it operates in and the nature of the product sold. When average incomes are falling, we would expect to see a decline in demand for products with a high income elasticity of demand – typically these goods and services are regarded as luxury items by consumers, things that they might choose to do without when the economy is going through a bad time. The demand for products with a negative income elasticity of demand (i.e. inferior goods) might actually rise during a recession!