• 02Feb

    What is a recession?

    Recession is a commonly encountered word in the media. We hear it all the time whenever the economy is said to be in poor health. What does recession really mean? And is it really bad for all members of a society?

    An economy is said to be in a recession when its total output, or GDP – measuring how much goods and services have been produced – declines for two consecutive quarters. One calendar year is divided into four quarters, often labelled Q1, Q2, Q3, and Q4.

    An economy can slide into a recession for a variety of reasons. All these reasons have one thing in common. They all cause the total economic output to decline. Some of these factors can be improved by a government. For example, declining productivity and international competitiveness could lower GDP, and cause an economy to enter a recession. Both governments and private institutions could help improve these factors.

    Productivity measures how much a single worker produces when working for an hour. A worker in Japan might produce 60 times as much as a worker in India when working for one hour, but the Indian worker could work 50 percent longer than the Japanese worker. Then, the Japanese worker would produce ‘only’ 40 times as much economic output in a year as the Indian worker. This might create the wrong impression that the Japanese worker is ‘only’ 40 times as productive as the Indian worker. But, by measuring productivity based on the output per worker in an hour, we can avoid this error. By measuring productivity levels of different countries at different times, we can also estimate whether that country is advancing its technological sophistication, or whether its economic upswing has more to do with increased flow of foreign or domestic investments and higher numbers of workers taking up jobs.

    If, for some reason, like declining quality of education or training, productivity in a country declines, then the economy could enter a recession. Similarly, falling international competitiveness due to a variety of reasons like poor law and order, poor infrastructure, ill-educated and ill-trained workers, poor work ethic or poor investment climate, could affect economic output and set off a recession.

    Some other factors like external supply shocks or poor external demand are beyond the control of any government. An external supply shock is an unexpected change (decline) in the supply or price of any raw good or commodity that is required for the production of an advanced or intermediate good. For example, a sudden spike in oil prices could hamper production across all economic sectors in an industrialized economy reliant on importing oil from abroad. This sudden rise in oil prices would drive down economic activity. Costs of transportation, electricity, heating, and industrial products will rise, while economic profits for producers will decline. Such a supply shock in the form of oil price increase can cause a recession.

    Hong Kong

    Hong Kong

    If tiny economies like Hong Kong, Dubai, or Singapore, which are highly reliant on foreign trade, enter a recession, it could be because big economies like China, EU, or the US have entered a recession. There is little that the governments of tiny, open economies like Hong Kong, Dubai, or Singapore could do because their economic growth is linked to trade with the world’s largest economies. In that case, we can say that the Hong Kong, Dubai, or Singaporean economy suffered from an ‘external demand shock’.

    Do recessions harm every person living in a country? Not necessarily. For example, economists attract greater interest during a recession as members of the public grow curious and want to find out how to make the most of the recession, as well as how to recognize signs for the end of the recession.

    Beyond that, debt collectors and brokers, pawn shops, vendors of second hand goods, and flea market businesses may flourish as consumers look for readily available loans, cheaper alternatives like used goods, and workers who are laid off from other industries may want to join the ‘informal’ economy.

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