Readers Question: How Long do Recessions last?
There is no exact answer. Recessions can last for varying time lengths depending on the causes and also the response of governments and consumers.
- If recessions are caused by a tightening of monetary policy (higher interest rates to reduce inflation) then it tends to be easier to get out of a recession, as the interest rate rise can be reversed and this will boost demand.
- If the recession is more of a balance sheet recession (bad debts, falling asset prices, bank losses) then the recession will tend to last much longer. For example, in 2009, interest rate cuts were insufficient to boost demand.
Examples of Recessions
The Great Depression
The Great Depression which started after the wall street crash in 1929, lasted for several years in the US. The length of the recession was due to several factors including:
- Before depression there had been growth in private consumption and debt, which left individuals and firms exposed.
- Global nature of depression. Many countries increased tariffs to try and protect domestic industries, but this caused lower global trade.
- In response to depression, Government’s tried to balance budget by increasing taxes, but this caused lower spending..
- Negative Multiplier effect.
- Allowing banks to fail, which led to a sharp fall in the money supply and lower aggregate demand.
- Lack of economic stimulus
- In 1937, there was a recovery in US, but a tightening of fiscal policy, pushed economy back into recession
See also: The Great Depression
In recent years, recessions in the UK and US have lasted for shorter time periods.
UK recession 1981 was severe for the manufacturing sector, but lasted less than a year. However, unemployment persisted at close to 3 million for another 5 years.
UK recession of 1991 – lasted less than 12 months, but when the UK exited the ERM and cut interest rates, the economy recovered quite quickly.
Japanese Recession of 1990s and 2000s
Throughout the 1990s and early 2000s the Japanese economy experienced period of recession and very sluggish periods of growth. Technically, the economy was not always in recession because it was expanding very slowly, but it felt like a recession because confidence was very low and growth extremely limited. This was mainly because of deflation – falling prices which make growth very difficult.
The recession of 2008- was very steep, with large falls in output. Also, recovery was very weak, with some countries going back into recession in 2011 and 2012
The reasons for the length of the recession were
Like the great depression, it was a balance sheet recession. This involved:
- Falling asset prices
- Bank losses from bad debts.
- Consumers try to pay off debts incurred in years leading up to recession.
- Dynamics of the Euro also made it much more difficult for countries in the Eurozone. (they had no option to devalue or pursue expansionary monetary policy)
UK Double Dip Recession
In 2012, the UK entered into a double dip recession. Output in 2012 is still below the 2008 peak
- Why recessions last a long time
- Paradox of Thrift – Why people in a recession often save, but this makes the recession last longer