Recessions are an inevitable part of the economic cycle and yet they always have a significant impact on economies. Roughly speaking, a recession is an economic downturn characterized by mass unemployment, waves of bankruptcies and low, technological innovation and investment (private or public). In times of recessions, many people are therefore concerned with the question of when the respective recession will end? But even outside of economic crises, people are always concerned with the effects and temporal aspects of recessions.
The following article will therefore deal with the topics of recession and its duration. First, a detailed definition of the term, including the characteristics of a recession, will be given before examples, countermeasures and forecasts for recessions are presented.
Definition and Characteristics of a Recession
The term „recession“ is derived from the Latin word „recessio“ (meaning „decline“ or „retreat“). It refers to an economic decline during a particular phase. A recession is part of an economic cycle in which recession and expansion (economic upswing) alternate. A recession always occurs when the economy, starting from a boom phase (also called a „boom“), moves in a downturn toward a trough (also called a „depression“).
A recession therefore marks an economic downturn characterized by declining economic activity. It can be recorded at both national and international level. In very concrete terms, however, a recession always refers to a significant decline in gross domestic product (also known as „GDP“). Other characteristics of a recession are rising unemployment, falling corporate profits and a drop in demand and investment. Consequently, government tax revenues also fall in a recession. In general, therefore, a recession can be described as a period of uncertainty, a decline in production and thus in the standard of living of an economy.
What factors influence the duration of a recession?
How long a recession lasts in a specific case depends on a variety of factors. Economic causes are the most common reasons for the occurrence of recessions. However, if structural problems are involved, recovery from a recession may take longer. Economic reforms and adjustments from the political side are then usually the means of choice. Likewise, monetary and fiscal policy measures have a major influence on how long a recession can last. A loose monetary policy (for example, in the form of low key interest rates) can counteract a recession, as more tends to be invested in the economy again.
However, it does not always have to be economic reasons that cause a recession. Natural disasters, geopolitical tensions or international crises can also fuel a recession (as external factors). Ultimately, the workings of the mechanisms that can cause a recession are exceedingly complex and vary from case to case.
Historical examples of recessions
Looking at the last 150 years of the global economy, recessions have occurred on average every 7 to 10 years. Thus, a recession in itself is nothing unusual and is part of economic life. However, no two recessions are alike, and in some cases the extent of a recession can vary greatly from one case to the next. In the following subsections, we will therefore take a look at the worst recessions of the last 100 years and their effects.
Great Depression of the 1930s
The Great Depression is considered one of the most severe economic and financial crises of modern times. It began on „Black Friday,“ which occurred on October 25, 1929. On that day, the world economy collapsed – some stocks suffered losses of up to 99 percent. As a result, industrial production and international trade collapsed. However, the effects only became apparent in the months and years that followed. Mass unemployment, bank failures and a drastic reduction in the gross domestic product of all industrialized nations were the result. The „Great Depression“ also represents the turning point for the reassessment of the role of the state in stabilizing the economy.
Financial crisis of 2008
The „Financial Crisis of 2008“ is another example of an economic crisis that is not quite as far-reaching as the „Great Depression,“ but is nevertheless the most severe economic crisis of the 21st century to date. It was caused by risky credit practices of well-known banks, excessive indebtedness and the collapse of the US real estate market. In addition to a massive stock market decline, the result was numerous bank failures and the loss of confidence of the average citizen in the banking world. The „financial crisis of 2008“ led to far-reaching reforms in the financial sector.
Measures to cope with recessions
To cope with economic recessions, there is a plethora of countermeasures, which will be listed here:
- Monetary policy measures (such as interest rate cuts)
- Fiscal policy measures (such as tax cuts)
- Promotion of willingness to invest
- Expansion of social security systems (such as unemployment benefits or social assistance)
- Promotion of international trade
- Promoting innovation and research (to open up new sectors of the economy)
- Structural reforms (to make the economy more competitive)
- Strengthening confidence in the economy (through targeted communication campaigns by governments).
While there are a variety of countermeasures in the event of a recession, a recession in itself is inevitable sooner or later.
Forecasts for future recessions
Because economic forecasts are based on complex models and analysis, as well as historical data and indicators, future recessions cannot be predicted. If this were the case, knowledge of an impending recession would in itself trigger another recession. The exact timing and severity of future recessions is thus unknown and depends on a variety of economic factors that are also subject to change. In principle, however, there will be triggers for recessions in the future that may not have existed before.
Conclusion on the topic of „recession“
Recessions are therefore inevitable phases in the course of an economic cycle that mark the economic downturn. They have a significant impact on the economy and individuals, but cannot be predicted or quantified. The duration of a recession is therefore always case-specific and can be shortened by various countermeasures. On average, a recession occurs every 7 to 10 years, which in turn can last between 2 and 5 years on average.
Related to the term „recession“ are, for example, the terms „expansion,“ „boom“ and „depression,“ which are also part of an economic cycle. While „expansion“ refers to the economic upswing, „boom“ represents the economic high phase and „depression“ the economic low phase.