What is an economic recession (including signs and causes)?

By Indeed Editorial Team

Published 24 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Recession is an inevitable part of the business cycle that occurs as a result of contraction and expansion in a country's economy. There have been several instances of economic recession throughout history, with the result being a reduction in financial stability, employment rates and salaries. Understanding the term ‘recession' in economics is important so that you can notice the signs and determine the impact a recession could have on you. In this article, we discuss the question ‘What is economic recession?' and its causes, discuss signs of economic recession and the ways to handle the effects of a recession.

What is economic recession?

To answer the question 'What is economic recession?' it refers to a prolonged downward trend in economic activity. The effects of an economic recession are visible in real GDP (gross domestic product), employment, business failures, real income, industrial production and wholesale-retail trade. These effects are a result of vulnerable industries or firms failing to overcome an economic downturn. Finance experts recognise recession as when an economic downturn occurs across two consecutive quarters and occurs with other short-term signs, such as unemployment. There is no definitive timeframe for an economic recession, although it lasts more than a few months.

What causes economic recession?

There is no set cause of an economic recession, but economists usually categorise potential causes in three categories: psychological causes, economic factors and financial factors. Economic recession can come as a result of one of these factors or a mix of them. Here is a summary of these three categories:

Psychological causes

These theories suggest that economic recession is an outcome of consumer pessimism with their environment. Positive consumer booms can also cause economic recession since they usually precede a downturn in spending or credit consumption. Keynesian economics also looks at the negative impact of investors on the economy. For instance, it suggests that when a recession occurs, investors often curtail investment spending in an aim for self-fulfilment. This leads to a reduction in consumer spending and incomes.

Economic factors

Some economic professionals believe that recession is a result of structural shifts and real changes in the economy. These changes can occur due to dramatic government policies which transform the rules of the business sector or political and social upheaval. Some economic factors are controllable whilst others come as ‘shocks' to the economy and precipitate recession. For example, the COVID-19 pandemic is an example of an economic shock. This situation almost caused an economic recession given the need for complete sector lockdowns.

Financial explanations

There are several ways that economic recession can occur in response to financial problems or factors. Some economists believe that monetarism causes a recession. Monetarism refers to the control of the money supply as a means of stabilising the economy. Some other financial explanations include the over-expansion of credit, the contraction of money and too much financial risk.

Signs of an economic recession

Several signs precede an economic recession. Knowing these signs is especially important for businesses looking to predict an economic spiral or downturn. Some common signs of an economic recession include:

  • Decrease in consumer confidence. Loss of confidence in the economy prompts consumers to stop buying. This is a defensive response to the potential economic decline that causes businesses to offer less employment as consumers keep their money in their banks and prevent them from meeting marketing goals.

  • High interest rates. Interest rates make it more expensive for individuals and businesses to borrow money. This has a negative impact on consumer spending as there's a lower amount of credit available to fuel purchases.

  • Wage price controls. This is a government response to an economic downturn that limits the increase in wages and prices over a certain period.

  • Asset bubbles burst. An asset bubble is a term that refers to when investment prices increase beyond sustainable levels due to expectations of future price increases. These investments may include housing, stocks or gold.

  • Deflation. Deflation refers to the general decline in the prices of goods and services. This means that demand falls as more people can buy goods, which causes a recession.

  • Stock prices drop, Stock price drops mean that a company has to sell additional stock shares to raise the same amount of money as before. This means previous investors lose out on entire investments which can cause stock market crashes.

  • Rising unemployment. Rising unemployment indicates that the economy is inefficient and operating below capacity. Unemployed individuals are also less likely to contribute to consumer spending and output since they don't have the means to do so.

  • High inflation rates. Adverse to deflation, high inflation is when consumers can buy less with the same amount of money. This means buying power declines and more people fall below the poverty line.

  • A slowdown in manufacturing processes. A decrease in manufacturing often signifies that there is less demand for a product. Demand is a crucial aspect of the economy and, without it, an economic recession is a possibility, in addition to this, a slowdown in manufacturing can impact individual businesses or whole sectors.

Related: How to calculate inflation rate and why it's useful

How to handle the effects of a recession

A recession can cause detrimental pain to the economy and alter it significantly. Although these effects are often temporary, they can have a lasting impact on individuals. Here are some tips on how to handle the effects of economic recession:

1. Consider a new career

Certain careers are recession-proof. This is because the services these jobs provide are essential to the day-to-day functioning of society. If an economic recession has affected you, consider a career in one of these sectors:

  • healthcare

  • education

  • utility services

  • specialised care services

  • law enforcement

  • government

  • emergency services

  • financial services

  • technology industries

2. Work with a staffing agency

Employment agencies can help you find temporary work during challenging situations such as an economic recession. These staffing agencies allow you to work with a recruiter and find jobs applicable to your skill-set and capabilities. Some employment agencies are industry-specific and therefore good for those who hold qualifications in a particular field.

It's often easier to get a job when you already have one. This allows you to take the opportunities provided by employment agencies as a chance to earn a temporary income whilst you conduct your job search. Remember that temporary jobs are often a means to the end of full-time openings, although it's usually a requirement to work for a preliminary amount of time beforehand.

3. Make lifestyle changes

It's crucial that you spend frugally during a recession, especially when facing unemployment. This means preparing meals at home and rationing on essential products. Where possible, you can also cycle to and from places rather than use a car. This allows you to save on petrol money and also bide your time with a new hobby.

4. Set work goals

If you're currently in a job, it's essential that you do your best to increase your job security in case job cuts happen. Set yourself mini-goals to reach on a daily or weekly basis so you can succeed in your role. Offer your assistance to those who require it. Make sure you don't sacrifice quality to quantity in an attempt to appear more productive as this can harm your job security.

Related: 9 useful short-term career goals for work and life

5. Update your CV

An economic recession is a good time to update your CV and other application materials, such as your cover letter template. Ensure that your CV follows a simple structure and is easy to read. Hiring managers prefer individuals who can demonstrate their qualities with measurable evidence, so use statistics where possible. Always proofread your CV and cover letter before sending them to hiring managers and ensure you tailor your documents to the job you're applying for.

Related: Bad CV examples and how to fix them (with tips to draft a good CV)

6. Rethink necessities

Ensure that you only buy essential household items to save money where possible. Consider shopping in sales outlets rather than supermarkets and put any money save by the end of the week into savings. This means you always have backup funds in case emergencies arise.

Depression vs. recession, what's the difference?

Economic depression is a long-lasting recession that can have a lifespan of years rather than months. There is no definitive time frame to differentiate between an economic recession and depression. Families and the economy experience the effects of economic depression for decades as they attempt to recover over a long-term basis. As a result, economic depression usually means greater unemployment rates, an increased amount of job losses and steeper declines in GDP.

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