Explained: What is a recession?

Distinct signs of economic weakness such as volatile equity markets, raging inflation and regular hikes in interest rates are compelling investors to ask the daunting question: Have we entered recession? To answer the question – no, the Indian economy is not in a recession.

Distinct signs of economic weakness such as volatile equity markets, raging inflation and regular hikes in interest rates are compelling investors to ask the daunting question: Have we entered recession? To answer the question – no, the Indian economy is not in a recession. Let us understand the precise meaning of recession. There are many ways in which recession can be defined.  

As per the National Bureau of Economic Research (NBER) which is recognized as the authority that defines the starting and ending dates of US recessions, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”  

In 1974, economist Julius Shiskin defined recession as two consecutive quarters of declining GDP. According to economists, a healthy economy expands over time, so two quarters in a row of contracting output suggests there are serious underlying problems. This simple rule of thumb eventually became a popular standard over the years.  

Citizens won’t likely know that the economy is in a recession until several months after the fact. For example, officials didn’t officially declare the Great Recession had begun until December 2008 almost a year into the downturn. Economists had even longer to wait for the coronavirus pandemic’s official end date which was 15 months after the fact. 

Economists do have popular recession signals. A popular one, known as the “Sahm rule,” which identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months. Part of the reason why recessions are tricky to spot is that data is released with a lag. 

Recessions have differing variations, degrees and depths, and each of them is caused by something different; however, they generally happen when there’s some sort of external shock — either on the demand or supply side. 

Recessions come in a variety of shapes, sizes, and depths, and each one is brought on by a unique set of circumstances. However, they often occur when there is some kind of outside shock, either on the supply or demand side.