Definition of recession. In the UK a recession is a period of negative economic growth for two consecutive quarters. This means there is a fall in National Output and National Income. Inevitably a recession will involve higher unemployment and an increase in government borrowing.
This diagram shows that there was a recession in 1981, 1991 and 2008-09. During these periods the UK experienced negative economic growth (fall in Real GDP)
Definition of Depression
A depression is considered to be a much more serious recession. There is no commonly agreed definition, but a depression is likely to have some or all of the following characteristics.
- A fall in GDP of 10% or more.
- A fall in GDP for over 3 years.
- Unemployment over 20%
- Definition of Depression
Some define recession as a period of rising spare capacity and rising unemployment. It is possible to have a ‘growth recession’ i.e. very low growth of 0.5% and people feel they are in a recession.
US Definition of Recession
In the US a recession is defined in a different way. The NBER don’t have a fixed definition limited to GDP statistics. They look at a range of statistics such as retail figures, unemployment and consumer confidence. A recession is defined when there is significant decline in economic activity. (NBER on recession)
Readers Question: What economic variables that can be affected positively by the economic slowdown.
1. Increased Productivity because firms have incentives to cut costs.
2. Lower inflation. Recession leads to fall in inflation and this can enable stronger growth in the long term.
3. Inefficient firms forced out of business (although this is a bit suspect.)
Readers Question: What are costs involved in recession?
- Lost output
- higher unemployment and social problems arising from that.
- Increased inequality due to unemployment. Wealthy can often by insured from affects of a recession.
- Higher government borrowing
- Causes of Recession
- How long do recessions last
- Balance sheet recession – a deeper form of recession where there is falling asset prices and firms and consumers are seeking to improve their balance sheets.