Aside from being inevitable, economic recessions are often widespread. Their broad and lingering effects can impact an entire generation worldwide.
Considering these aspects and more, it only means that recessions can and will come in different forms.
This article will tell us more about this economic chapter by unveiling the different types of recessions and how they identify in signs and implications. Only then can we better understand every economic episode and find the best approach to dealing with it.
Classification of Economic Recessions:
Balance Sheet Recession – This type of recession occurs when consumers and businesses slow down their spending habits in an attempt to clean their balance sheets. Cleaning balance sheets means freeing one’s account from voluminous debts. As they hope to pay off liabilities, consumers focus more on settling them rather than spending. Ultimately, a lower cash flow toward expansion and higher saving activities can take time for a recession to subside.
Boom and Bust Recession – Generally, a boom and bust recession counters a should-be-increasing and steady overall economic growth. This downturn happens because of how central banks manage the money supply. A boom occurs when an economy exceeds its expected growth. During this period, lending offers low interest rates, encouraging people and enterprises to borrow money, invest, obtain favorable returns, and push the economy up.
On the downside, overinvesting can happen under friendly credit arrangements. When it happens, channels overinvested in will decline in value due to low demand – leading to a bust or recession. During this period, credit tightens, consumers cut spending, companies lay off, and investors lose money.
Depression – A drastic decline in output and an increase in unemployment are only two indicators of depression. Experts link this type of collapse to the balance sheet recession as it depicts adverse bank loss effects and reduction of asset prices. But again, what makes depression distinct from other recession classifications is it can persist for decades. This circumstance means that its effects can lead to extreme economic restructuring. Although growth can be visible during this time, it tends to be slow with minimal effects on the industry.
Supply-Side Shock Recession – Unlike depression, the supply-side shock recession can only last a few years. This recession often occurs from external factors like wars, natural calamities, or world health emergencies like COVID-19.
When at least one of these happens vastly, the world’s supply system suffers a shock, which then leads to a recession. Although supply-side recessions can subside from supply restoration, there can still be shifts in supply chains, permanently changing or tapping into new sources.
Recession Recoveries
Visualizing is one of the many ways to identify different kinds of recessions. By using graphs, experts can classify recessions better by checking the start and end of the plot.
L-shaped recession – L-shaped recessions are the most critical since these exhibit low to negative GDP, economic recovery, and investments.
V-shaped recession – Unlike the L, the V-shaped recession has the quickest long-term GDP impact. Growth often resurfaces after a swift disturbance in the supply chain.
U-shaped recession – This recession takes longer than the L in terms of recovery. The GDP track shows more length in this graph, indicating an extended growth period.
W-shaped recession – W-shaped recessions often come as the combination of the V and U recessions. Second drops in this recession type usually lead to worsened consumer confidence, eventually reducing their confidence in spending.
How we identify recessions will depend on their causes and impacts. Since this economic episode is often broad, it has no distinct length, intensity and recovery designed ahead for experts to counter it.
What matters, after all, is how we analyze its occurrence. Only then can we account for its technical areas and deal with its inherence in the economy.
