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Understanding Recessions
What Is a Recession? A recession is a significant and prolonged decline in economic activity. It is characterized by negative gross domestic product (GDP), rising unemployment, decreasing retail sales, and reduced income and manufacturing levels. Recessions are part of the business cycle, which alternates between periods of economic growth and contraction. In Canada, the government, through the Bank of Canada or the minister of finance, determines and announces the onset and end of recessions.
Defining a Recession A recession occurs when economic activity falls sharply across various sectors. The C.D. Howe Institute’s Business Cycle Council in Canada defines a recession as a pronounced, persistent decline in economic activity. They assess the extent of the decline, its duration, and its impact across different sectors, focusing on GDP and employment metrics.
Causes of Recessions Recessions can arise from several factors:
- Economic Shocks: Unexpected events like the COVID-19 pandemic can cause sudden and severe economic disruptions.
- Asset Bubbles: When market bubbles burst due to irrational investment behavior, it can trigger a recession.
- Excessive Inflation: High inflation can lead central banks to raise interest rates, slowing economic activity and potentially causing a recession.
- Excessive Deflation: Falling prices can reduce spending and investment, leading to economic contraction.
- Technological Change: Major technological advancements can disrupt existing industries, leading to temporary economic downturns.
Recession vs. Depression While both involve significant economic decline, a depression is more severe and prolonged than a recession. Depressions are marked by deeper job losses, higher unemployment, and more significant declines in GDP, lasting for years rather than months. The Great Depression of the 1930s is a historical example of a depression's profound impact.
Predicting a Recession Forecasting recessions is challenging, but certain indicators may signal an upcoming downturn:
- Inverted Yield Curve: An inversion occurs when long-term bond yields fall below short-term yields, often signaling a recession.
- Declines in Consumer Confidence: Reduced consumer confidence can indicate anticipated economic trouble, leading to lower spending and slowing economic activity.
- Stock Market Declines: A sudden drop in stock markets may suggest that investors expect a recession.
- Rising Unemployment: Increasing job losses are a strong indicator of economic trouble ahead.
Impact on Individuals During a recession, job losses become more common, and finding new employment becomes harder. Those who remain employed may face reduced pay and benefits. Investments in stocks, bonds, and real estate may lose value, affecting savings and retirement plans. Financial difficulties can also lead to the loss of property if bills cannot be paid.
