Expansion, peak, contraction and trough are the four phases of the global economy that makes up the process known as the economic or business cycle.
And just like any other revolution, the economic cycle has its ups and downs. These are unavoidable due to changes in the financial market, supply and demand and policy interventions. Since economic activity is not always at its peak, economies will have to deal with recession throughout the cycle.
Economic recession: What is it?
This stage in a business cycle depicts a decline in economic activities. Recession is often evident when GDPs, or Gross Domestic Product, are at a negative scale for two consecutive quarters. Although experts have a more complex way of assessing and quantifying recession, it doesn’t change the concept that this economic phase negatively impacts several sectors.
Besides the potentially overwhelming length of a recession season, there is a need to consider its scope since this is not an area-specific phenomenon. Recessions are significant, widespread and often prominent around the world when they happen.
Why learn about economic recessions?
While it is simple to attribute losses to financial crises and weakened sales, learning about economic recessions will help us understand these declines with a deeper perspective.
Comprehending economic recession will not only allow us to see a down-turning situation. It will also lead us to accept that companies may cut costs in capital spending and research, restrain credit, or hint at potential bankruptcy.
Historical context of economic recession
Here are some of the most notable historical economic recessions:
The Great Depression – From 1929 to 1939, the Great Depression proved that recessions back then could be lengthily dismal. During the 10-year downturn, there were tremendous income and output losses and record-breaking unemployment trends. Conceptually, this event caused significant modifications in macroeconomic policies, economic institutions, and economic theories. Everything was on a downward trend – US GDP down by 30% and industrial production by 47%. Unemployment was higher than 20%, marking the highest in history. This event might have seen varying intensities with other countries. But like Great Britain and France, low recessions and glimpses of recovery couldn’t equate to the overall impacts of the Great Depression. Here’s what sparked this known economic downturn in history.
1. Stock market crash due to tight monetary policies
2. Banking panics from the loss of depositor confidence
3. Decline in money supply to comply with the gold standard
4. Reduced US international lending because of high interest rates
OPEC Oil Price Shock – The Arab nations-backed Organization of the Petroleum Exporting Countries (OPEC) perpetuated this oil crisis in 1973 following the United States’ support to Israel during the Arab-Israeli war. OPEC restrained exporting oil to the US, yielding excessively high prices and shortages in the latter. Stagnation and inflation further worsened the situation, prolonging the recovery period to a few years more.
The Asian Crisis – Thailand first experienced a shortage of foreign currency resources in July 1997. As a result, it had to let go of fixed exchange rates with the US dollar. This event caused neighboring East Asian nations to panic as dollars of foreign investments faced reversals and threats of government bankruptcies became prevalent. But while the International Monetary Fund stepped in to prevent defaulting the affected countries, it took years for these nations to recover.
Covid-19 Recession – While it seems like the COVID-19 pandemic only happened yesterday, it has been almost five years since it first took a toll on the global economy. Sharp market declines were seen and felt in the global market during this period, a never-before-seen crisis in the last 100 years. Unemployment rates were dramatic and poverty worsened anywhere in the world. Even though economic policy responses went underway, these only placed the world at increased debt levels.
This part of the economic recession study only prepares us for a broader discussion of this global phenomenon. In the succeeding releases, we will further understand what causes economic recession, its types, impacts, relevance and how historical recessions compare to recent occurrences, among others.
