What is Recession?

In general, a recession occurs when a country, having reached a certain production capacity, is no longer able to exploit it completely: for example, because the overall demand for goods and services decreases. Recession is the opposite of economic growth, i.e. the development of a country in various sectors with an increase in wealth, consumption, production of goods and services.

When does it go into recession?

Over the years, economists have developed theories, even very different from each other, to determine when a country enters a recession. There is therefore no single answer and much depends on which economic indicators are taken into consideration: the economy of a country is a very complex thing and not always very easy to analyse. Among the various systems proposed, the one proposed by the economist Julius Shiskin in an article in the New York Times met with considerable success in 1975 and is by now the one universally adopted. Shiskin suggested considering the trend in gross domestic product (i.e. the value of all goods and financial services produced by a country) in two consecutive quarters: if the data is negative in both, then the country is in a recession.

Returning to the initial example: if for two consecutive quarters the value of all the goods and services produced by a country decreases, it means that "the production levels of a country are lower than those it could have". That country's economy could do more, but it isn't.

What happens when there is a recession

The effects of a period of recession can be many and much depends on how the economy of the country that finds itself in this condition is structured. A period of recession can therefore have different levels of severity, which of course also influence the chances of getting out of it well and quickly. Among the consequences there may be, for example, a further drop in employment linked to lower production, a stronger distrust on the financial markets and therefore less investment and an increase in the cost of living.

Depression

Depression can be considered a chronic state of recession. Again, economists have produced dozens of theories and systems for evaluating when a country enters a depression. The factors to be evaluated are many and different from each other, however many economists agree in considering two fundamental conditions. We speak of depression when the negative change in GDP exceeds ten per cent or when the recession lasts for a very long time, for at least three or four years.

How does it come out

Again, there is no single solution: much depends on the severity of the recession, the political orientation of governments and the economic policies they want to implement. In general, it is believed that among the causes there is a drop in aggregate demand, i.e. in the demand for goods and services (the exploitation of a country's production capacity). An attempt is therefore made to leverage this factor to put things right, restarting the economy.

Some economists – defined as monetarists – generally push for expansionary monetary policies, i.e. which provide for the reduction of interest rates so as to stimulate the supply of money by banks to businesses to increase investment and production. Economists closest to Keynesian theories advocate an increase in public spending to restart the economy, which however often clashes with debt. Other remedies may be the reduction of taxes to encourage investment by businesses. Finding the right balance is not easy, especially in the current highly interdependent economic system between the various countries.