With all the talk in the news of a possible impending recession, have you wondered what this term means? This article goes through the concept of a recession and what it could mean for the general public.
An economy’s gross domestic product (GDP), which is the market value of all the final goods and services produced by a nation in a specific period, changes over time. If the GDP this period exceeds that of last period, the economy is said to be growing. The fluctuations in both positive and negative economic growth cause a business cycle with peaks and troughs. The time between a trough and the next peak is called an expansion, while the time between a peak and the next trough is called a contraction.
By the textbook definition, a recession occurs if there are two consecutive quarters of negative economic growth. In a recession, we often see reduced consumption and investment, low business and consumer confidence, and rising unemployment rates as firms lay off workers or shut down. The current post-pandemic situation that we find ourselves in is a rare case of low unemployment accompanied by low economic growth, potentially caused by disengaged workers leaving the job market and the lack of foreign holiday workers.
If a recession extends into a longer timeframe, the economy will be stuck in what is known as a depression. This would result in severe outcomes to the economy. For example, people who remain unemployed for too long could find it difficult to re-enter the workforce, or households could find it hard to repay their loans. To stimulate economic activity and minimise the burden faced by the public, policymakers would often rely on expansionary fiscal or monetary policy.
