The recession is an economic phase during which the economic performance of an economy continuously declines. This phase is primarily characterized by falling order numbers, rising unemployment and a generally more pessimistic climate. The recession is preceded by the boom and it itself leads to the depression.
In this lesson we explain the most important characteristics of a recession, the economic development during this phase and the typical behavior of market participants. At the end you will have the opportunity to check your newly acquired knowledge with a few exercise questions.
- Synonyms: Contractive economic cycle | Downturn
- English: Recession
Why should you know about the recession?
Alongside the upswing, boom and depression, the recession is one of four economic phases that make up the business cycle. This cycle describes the development of an economy over longer periods of time. It is therefore important to know the individual phases in order to be able to identify them. This knowledge can in turn be the basis for groundbreaking strategic decisions.
Features and course of the downturn
The actual downturn, i.e. the contraction of economic output, is initiated during the boom as it overheats. According to the current definition, however, a recession only occurs when the economy does not grow for two consecutive quarters and in comparison to the preceding quarters and the gross domestic product falls. During the recession, the economic downturn becomes increasingly apparent to all market participants and strategic decisions are adjusted accordingly.
According to howsmb, the advancing recession is particularly noticeable among companies in the form of falling order numbers. As demand falls, stocks are increasing and overcrowded warehouses are becoming more common. As a result, decreases the utilization of capacity, the first production to be shut down and it is expected to decline in wages and an increasing number of unemployed.
Due to their lower incomes, private households restrict consumption and increasingly tend to put money aside for bad times. This usually increases the savings rate during a recession.
Fixed-term employment contracts are no longer extended and employees who are still in a probationary period are less likely to be taken on by the company in an open-ended relationship. In addition to stock exchange prices, prices and interest rates are now also falling.
From recession to depression
As soon as the economy remains at a low for a long time, during which a further decline cannot be ruled out, the next phase of the economy is reached with the depression.
The Austrian economist Joseph Schumpeter characterized the recession as a kind of corrective in which the economy in general becomes more sensible again and companies that are not viable and strongly supported by the optimism of the upswing and boom phase disappear from the market.
Recession: phases of the business cycle
The most important characteristics of a recession at a glance
- Rising unemployment figures
- Falling order numbers
- Pessimistic sentiment among companies and households
- Decreasing prices
- Less investments and lower investment volumes
- Falling national income with falling wage levels
- Higher savings rate
- Declining consumption