What is a Recession?

The Business Cycle:

To understand the concept of recession, we need to start with the business cycle.

A business cycle represents the upturns and downturns of an economy over a given time. It consists of 4 main components, an expansion, a peak, a recession, and a trough.

Credit: Corporate Finance Institute (2021)

A recession is a normal part of the business cycle, usually preceding a peak. It becomes a problem when recovery is delayed or prolonged.

Signs of a Recession

Some events leading up to a recession are:

War and globalization:

The Ukraine-Russian War (2022) has revealed the impact of globalization on different economies.

Although outsourcing can make economies more efficient (in some ways), it can also hurt them during a war. In the U.S., we've seen gas prices skyrocket as a result.

Consumer Confidence:

How consumers feel about spending can affect the economy. If consumers are confident, for example, due to employment, stable income, etc., they'll be more confident in spending and investing.

Contrarily, when consumers start panicking or withdrawing from economic activities, such as not investing, losing their jobs, etc., the economy begins to go south.

The Value of Money

Factors such as interest rates and inflation can influence economic activity. When interest rates increase, stock prices fall, and consumers panic, leading to withdrawals.

The Stock Market:

As earlier mentioned, falling stock prices can affect stockholder behavior and lead to a recession; activities in the stock market can reveal where an economy is headed.

Are there other signs you know of that lead to a recession? Leave a comment below!

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