What Is a Recession and Depression?
When economic activity takes a dive that lasts for months or possibly years, that is called a recession. An economic depression is a situation that is more serious. Let’s explore this subject more.
A Recession Explained
When any country records negative figures in its Gross Domestic Product (GDP), that is a recession. Retail sales fall, along with unemployment rates. On top of that, manufacturing and income contracts for a prolonged period. All of these signs point to a recession.
A recession is unavoidable. It is part and parcel of how the business world works. Expansions and contractions will happen in every nation and economy. There will be a couple of signs that will indicate a recession is happening.
The first is that the GDP declines for two quarters consecutively. The decline in the GDP will be the most visible sign. Another sign is that the decline spreads across the nation’s economic activity. This decline would usually last a few months.
The effects of a recession are felt in GDP results, employment, income levels, sales in wholesale and retail, and even industrial production.
A Depression Explained
Depressions are a lot more severe. At least, the impact of an economic depression is much worse. The job losses during depression are much higher and the decline in GDP rates is steeper than in a recession. Economic depressions also last much longer than a recession.
A recession might last a few years whereas a depression lasts for years. It also takes much longer for a nation to recover when they experience a state of depression. One example of this was the Great Depression which lasted from 1929 to 1933.
Why Does A Recession Happen?
There could be several reasons why a recession happens. A sudden shock to the economy could trigger a recession. One such example was the Covid-19 pandemic that caused a global lockdown. That caused a sudden economic shock when it happened.
Asset bubbles are another factor that could trigger a recession. This happens when investors become too optimistic when the economy is strong. This optimism then inflates real estate and stock markets. However, once the bubble pops, panic happens and the markets crash.
A recession could also happen when there’s too much debt incurred. This could be from either businesses or individuals. When the debt gets to a point where these businesses or individuals can’t keep up with the payments, that causes a recession.
Another recession trigger is too much deflation and inflation. The last potential recession trigger could be a change in technology. When new inventions and discoveries are introduced, especially when it impacts manpower, a recession could be triggered.
What Can You Do During A Recession and Depression
While there’s no way of definitively predicting a recession or depression with accuracy, there are signs to look out for. It can be very stressful and alarming because you’re worried about losing your job. Possible pay cuts make it hard to survive too.
A lot of financial losses are incurred during both situations. Both individuals and businesses will be hit hard in both times. The best thing to do is to stay optimistic, know that it’s not going to last, and wait for things to turn around.