What is a Recession and How can it be Avoided?

Recession! A nightmare for economists, governments and common people alike. Capitalism, the economic system we currently live in, is based upon “eternal” growth and, whenever the process is disrupted, it halts the entire society’s output.

So how can this happen? Has it happened already and if so, how did they get out of it? But, most importantly, how can a recession be avoided altogether?

Here’s a brief guide to understanding this crucial and very present economic problem.

What is a recession

So, as the reader probably understood by now, a recession is when the process of growth is disrupted. But there must be a precise definition, right? Indeed, there is.

Of course, every nation is different and might have a separate definition of recession. However, the generally more common way to define it is “Two or more quarters of GDP degrowth”.

The GDP is the economical output of a given country. Every good produced, every service sold, every government investment… everything is included into the GDP. A healthy economy sees GDP constantly growing. Obviously, developed nations which already enjoy a good standard of living will have a smaller growth than developing nations which just started a process of industrialization.

India, for example, a country that started heavily industrializing in the last few decades, saw its GDP rise by 8.2% in 2022. For comparison, the United States, the world’s biggest economy, grew only by 2.1%.

But growth must be sustained, no matter how small the percentage could be. If a country’s economy does not grow for two quarters (meaning ¼ of a year) in a row, they are technically in a recession.

Examples of recession

Since, as we said, eternal growth is literally and physically not possible, recessions are a natural conclusion of Capitalist countries. There have been many, many recessions in the last century. And mind you, every recession entails people losing money, jobs and sometimes much more.

Perhaps the most famous historic example of recession is the Great Depression of 1929. In the decade prior, the United States was experiencing its biggest growth in history, and in the decade after they experienced suffering the likes of which were considered unthinkable.

More recently, another major global recession happened in 2008 following the collapse of the American housing market. Of course, Covid lockdowns also entailed an economic recession.

Both in 1929 and in 2008, the world finally recovered from a recession through a steady and constant stream of government spending into the economy. State institutions poured money into creating new jobs and opportunities, which eventually dragged the economy away from the high grass.

How can a recession happen and how can it be avoided

Now we know what a recession is and we know that it is a recurring economic phenomenon. But how can it happen? By knowing the effects that create it, we might be able to avoid it, right?

Well the problem is that every recession happens for different reasons and, though predictable, it is often unavoidable.

Generally, a recession takes place whenever a major industry collapses. It was the case in 1929 with the stock market and in 2008 with the housing market. In those cases, a forward-looking government might perceive the danger incoming and take measures before the economy actually crashes.

However, a recession can also happen because of international events. In 1973, when OPEC decided to halt oil exports, a recession could not be avoided. Oil, at the time like today, is a central commodity for our everyday life, therefore its absence simply causes the economy to halt.

Indeed, the war in Ukraine could possibly cause a recession in 2023. Having started in concomitance with high inflation, these two factors combined might drive the global economy down this year. Central banks and national governments are trying their best to avoid it, but it is a difficult challenge.

Finally, a recession can also occur in unexpected circumstances. It was the case with Covid, a massive pandemic that simply wiped out the entire global economic output of one year. Though in those cases, given the sudden nature of the event, it’s generally easier to come back from a recession. We saw it, again, when Covid lockdowns were lifted and people could come back to work.

An important detail

A last, important piece to keep in mind when asking why a recession is often unavoidable is the complexity of a country’s economy. We said that the measure for recession is GDP, but this is such a wide array of factors (literally billions) that it’s impossible to track as it takes place. As a result, GDP data is often released after its relative quarter, meaning that a nation could already be in a recession without knowing it.

Again, it’s the job of central banks and governments to try and predict GDP measures, but it is such a difficult task that it’s hard to blame them when they don’t succeed.