Recession is often seen in a negative light, but it’s an essential part of the business cycle. This award-winning explainer helps readers to better understand how a recession works and how it can reset the economy for the long term.
A recession is a period of slowing economic activity that typically encompasses a contraction in gross domestic product (GDP) and a rise in unemployment. Other summary indicators also show weakness, including stock market declines, a spike in commodity prices and rising inflation, and a higher rate of business failures. The National Bureau of Economic Research officially declares recessions based on a combination of these factors and other trends.
During a recession, it can be hard to find work or access credit. This can be particularly difficult for those with children or who are saving for retirement or other large investments. Rising prices and inflation can also reduce purchasing power, making it harder to buy goods and services. The stress and uncertainty that often accompanies a recession can also lead to reduced quality of life and an increased need for health care.
The causes of recession can be complex and include factors like over-investment in certain sectors of the economy, which can result in a speculative bubble that bursts with devastating consequences. Other contributing factors can include political instability, war or other global conflict that can affect investor confidence and economic activity. Changes in interest rates can also contribute to a recession, as higher rates make borrowing more expensive and decrease the flow of savings into the economy.