What is a recession?

The US economy contracted second quarter running amid aggressive monetary policy tightening by the country’s central bank, which has been trying hard to bring down decades-high inflation.

As the GDP numbers became public, some experts said that the US is already in recession, while criticising the central bank for being in “recession denial” mode.

If the gross domestic product (GDP) of the country shrinks for a sustained period of time, then the economy is said to be in recession. While there is no universal consensus on the exact definition of recession, economists usually see the negative GDP growth for two consecutive quarters as an indicator for a technical recession.

Usually, a recession in the economy is accompanied by high unemployment, falling industrial activity, investments and fewer profits.

Recessions are caused due to a host of factors that could be sudden shocks like a global pandemic, wars, high inflation levels for extended time periods among other reasons. For instance, when the pandemic hit, lockdowns across the globe snapped supply chain, brought economic activity to a standstill and pushed major economies towards recession.

Similarly, high inflation in the economy forces central banks to raise interest rates too quickly, making the cost of credit more expensive for businesses and people. Higher borrowing costs also dampen investments as companies cut down on expansion and the economy slows down as people spend less.

So what is the impact of recession? Economic downturn of any magnitude leads to job losses and fall in incomes, causing severe economic pain. The financial markets will also be under severe stress during this period.