Wednesday, February 27, 2013

Definition of Recession

In the UK, the standard text book definition of a recession is:
"Negative economic growth for two consecutive quarters". This means there must be a fall in real output for a period of 6 months.
A recession means there is a fall in real national output and real national income. 

UK Recessions in 2008, 2012


  • This graph shows the UK was in a recession in from 2008 until Q3 2009.
  • There was a 'double dip recession'  from Q4 2011 to Q2 2012.

Features of a recession include:
  • higher unemployment, 
  • lower living standards.
  • increase in government borrowing
  • often falling asset prices (e.g. falling house prices) 
There are different  Types of Recession such as:

Balance sheet recession - a recession caused by high levels of debt in private sector causing firms and consumers to 'deleverage'

Difficulties of defining recessions
  1. Population Growth: If the population was increasing by 1% a year. Real GDP growth of 0.5% would mean Real GDP per Capita was falling. This is an important factor for countries like the US which have growing populations.
  2. Statistics can be inaccurate. Often GDP statistics are inaccurate and need to be revised down. Therefore, growth of 0.3% could actually mean growth is falling 0.2%. However, figures can be rounded up as well as down.
  3. Growth below trend rate. If capacity grows by an average of 2% a year, then economic growth of 0.8% a year, would mean a rise in spare capacity and therefore, unemployment is likely to rise. Therefore, some economists feel we should call a recession, if spare capacity is rising. However, the problem with this is that it means economic growth of 1.0% could be classed as a recession, which creates confusion. Some economists refer to a 'growth recession'. Low growth compatible with features of recession.
  4. Unemployment. Arguably, a distinguishing feature of a recession is rising unemployment. If unemployment rises significantly, then this signifies the economy is in recession. It would seem churlish to say the economy was not in recession, if unemployment has risen by 0.5 million but, growth is just about positive. However, how much unemployment would have to increase by? Also, unemployment could be caused by supply side factors, rather than demand side factors.
  5. Survey. You could ask a survey of economists / people, whether they think the economy is in recession. But, this is very subjective. At the moment, 53% of economists think the US in in recession, but, 47% don't - how helpful is this? (see: Why is the US not in recession?)
'Growth Recession'

Some define recession as a period of rising spare capacity and rising unemployment. It is possible to have a 'growth recession' i.e. very low growth of 0.5% and people feel they are in a recession.

US Definition of Recession.

In US, a recession is said to occurs, whenever the National Bureau of Economic Research NBER says so. There definition is:
..... a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
NBER further tells us that:
"There is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process."
This clearly is injecting a lot of subjectivity into the definition. I appreciate the reasoning behind the statement, but, it creates uncertainty as to what will cause a recession.

Definition of Depression.

There is no universally agreed definition of a depression, but common ideas include real GDP falling by 10% or real GDP falling for two years.

For example,  in the Great Depression of 1929-33, output fell by 18%
External Links
Further Reading on Recessions

1 comment:

News247 Ireland said...

Informative post indeed! I have heard the term recession a decade before but never understands its true meaning. All I know before reading this post is recession means unemployment. Recession is a global issue and powerful nations like US and UK are facing this problem more severely. As the economy of developing nations like India, China, etc. is more or less depends on these developed nations, effects of recession can equally be noticed there as well.