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Recession

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 12, 2022

A recession is a period of slow growth where a country’s economy begins to shrink. It is defined as at least two consecutive quarters of negative economic growth. 

It is not entirely clear whether there are official dates on which this slow growth must be observed; it is only required that an economy shrinks for at least six months. 

What can start as a small decline in the economy, often referred to as a ‘recession’, can turn into an economic depression.

Recession vs Depression

Both terms are defined by negative GDP growth. However, there are two important distinctions: 

GDP

The first and most important distinction between recession and depression is that the amount of decline in real GDP must be significant. If the real GDP declines by only one or two percent, then technically we would be in a recession. 

However, this kind of growth could hardly be described as depression. The distinction between a significant decline and a small decline also tells us something about how to prepare for the possibility of entering a recessionary period.

Employment

The second distinction between recession and depression is that when an economy enters into a depression the situation becomes much worse than in any previous economic downturn, so bad that some people can no longer find jobs. 

What sets depression apart from a recession is the extent of human suffering. In fact, during a depression, it is characterized by massive unemployment – sometimes as high as 25% – while during recessions unemployment hovers around 6% to 8%.

Signs That the Economy Experiences Recession

There are no quantitative measurements of a recession, and sometimes it can be difficult to tell if you’re in one. A few warning signs that we’re in a recession: 

  • The decline in the gross domestic product (GDP)
  • Unemployment increases significantly up to 6%-8%
  • A large number of people in poverty
  • The price of consumer goods and commodities such as food and energy increased significantly 
  • A steep drop in stock prices
  • There is a significant decrease in the amount of money we spend on large purchases, such as cars and homes

Is the Covid-19 Pandemic Considered a Recession?

During the Pandemic, we have experienced a significant slowdown in the economy. Because of this, a recession has occurred. Covid-19 is considered a recession because it meets the criteria to be defined as one.

The following scenarios contributed to the recession that occurred during the Covid-19 Pandemic:

  1. A decline in consumer spending 
  2. Decline and job layoffs and unemployment 
  3. Decrease of GDP and average income per capita 
  4. Decrease in demand for most goods and commodities such as food, energy, clothing, etc. 
  5. The stock market decline was caused by investors’ panic-selling. This resulted in companies cutting costs which contributed to the number of workers who were laid off. 
  6. As a result, the economy experienced deflation or general price decline, making it difficult for companies to increase their market share. Businesses’ increased demand for labor in response to Covid-19 affected both wages and employment opportunities. 

Effects of Recession

The effects of the recession are wide-ranging and can have long-term implications for the economy, including:

  • Reduced overall economic activity. 
  • Revenue shortfalls in local government budgets due to reduced tax revenue. 
  • Hiring freezes, layoffs, or other cutbacks by employers to reduce operating costs. 
  • Decreased consumer spending (people spend less money on luxury items or services) 
  • Rises in the unemployment rate

How to Prepare for a Possible Recession

If you want to be well-prepared if an economic crisis happens, there are several things you can do at home: 

Stocks and Bonds

Make sure that any extra money you have is invested in stocks or bonds. If the economy continues to decline, you need all the financial resources you can get. 

Retirement Accounts

If possible, put as much money as you can in your retirement account, because if a recession happens and we enter into a depression, it’s best to have your savings ready. What’s more, unlike during a recession, there is no way to know when the economy will recover, so it’s best to be prepared.

Building a Financial Safety Net

If you can, save money for an emergency – such as if a family member gets sick and requires expensive medical treatment. What’s more, we never know what type of crisis we could face in the future or how long it will last, so it’s best to have extra money just in case.

Countermeasures for Recession 

Once an economy begins to decline, several countermeasures can be taken to end the recession. Although these measures will help the situation in terms of economics or finance, they don’t necessarily solve all of the problems associated with a recession.

Governments respond to recessions by introducing countermeasures aimed at stimulating the economy and promoting economic growth. 

Fiscal Policy 

The government tries to influence the level of economic activity by modifying tax rates or government expenditure. 

Monetary Policy

The central bank controls the money supply in an economy, which affects interest rates to make it easier for people and businesses to borrow money.

If inflation continues to increase, the central bank increases the interest rate that banks charge for credit. 

Loans and Grants 

The government can also help students and small businesses by providing loans or grants to them. What’s more, the hiring freeze is gradually lifted as the economic situation recovers, which helps those who have been laid off.

Key Takeaways

A recession is defined as “a period of temporary economic decline during which trade and industrial activity are reduced”. 

The causes of this recession were due to decreased consumer spending, revenue shortfalls in local government budgets, hiring freezes, layoffs, or other cutbacks by employers, etc. 

The effects of the recession are wide-ranging that can have long-term implications for the economy. 

There are several things that you can do at home to prepare yourself for a possible recession, such as investing money in stocks and bonds, putting away extra money for an emergency fund, and saving for retirement if possible.

It is always better to be prepared for a possible crisis, such as a possible recession, to make sure that you are always financially secure.

A period of temporary economic decline during which trade and industrial activity are reduced.
There are several ways to tell if you're in a recession, such as looking at the GDP, employment rates, etc.
The causes of this recession were due to decreased consumer spending, revenue shortfalls in local government budgets, hiring freezes, layoffs, or other cutbacks by employers, etc.
The effects of the recession are wide-ranging that can have long-term implications for the economy. It affects the GDP and unemployment rate of every country.
There are several things that you can do at home to prepare yourself for a possible recession, such as investing money in stocks and bonds, putting away extra money for an emergency fund, etc.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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