Meaning and Impact of Recession

Readers Question: What does a Recession mean?

The definition of a recession is negative economic growth for two consecutive quarters. (see: definition of recession (definition of depression)

How does the recession impact:

1) Savings

In a recession, private sector savings tend to rise. This is because people become more nervous to spend. The spectre of unemployment encourages people to save more and spend less. However, the rise in private sector saving may be offset by a fall in public sector saving (i.e. government borrowing increases to try and stimulate the economy)

2) consumption

Consumption will tend to fall because people are worse off.
3) Investment
Investment will fall. Usually investment is highly cyclical. Therefore, a recession causes a bigger % fall in investment than consumption. Confidence is very important to investment so in a recession, investment tends to dry up.

4) goverment spending
Automatic fiscal stabilisers will cause government spending to rise. e.g. in recession, government have to spend more on unemployment benefits. Also the government may pursue expansionary fiscal policy to try and increase aggregate demand e.g. spending on infrastructure projects.

5) aggregate demand

Aggregate demand is falling in a recession

See also: Impact of recession