Understanding Recession, Why it Occurs and its Impact.
                     Understanding 
Recession, Why it 
Occurs and its Impact
WHAT IS RECESSION?
• A recession is when the GDP growth rate of a country is negative for two consecutive 
quarters or more. 
• But a recession can be gauged even before the quarterly gross domestic product 
reports are out based on key economic indicators like manufacturing data, decline in 
incomes, employment levels etc.,
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Indicators of a 
Recession
Gross Domestic Product (GDP)
• Real GDP indicates the total value generated by an economy (through goods and 
services produced) in a given time frame, adjusted for inflation. Negative real GDP 
indicates a sharp drop in productivity.
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Real income
• Real income is calculated by measuring personal income, adjusting it for inflation, 
and discounting social security measures such as welfare payments. A decline in real 
income reduces purchasing power.
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Manufacturing
• The health of the manufacturing sector, taking into account overall exports/imports 
and trade deficits (or a trade surplus) with other countries, signifies the strength and 
self-sufficiency of an economy.
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Employment
• A high rate of unemployment is a lagging indicator. It typically confirms an economy’s 
pivot into a recession stage rather than predicting a recession in the future. Usually, 
unemployment rates nearing 6% of the total workforce are considered problematic.
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Causes of a 
Recession
Real factors
• A sudden change in external economic conditions and structural shifts can trigger a 
recession. 
• This fact is explained by the Real Business Cycle Theory, which says a recession is 
how a rational participant in the market responds to unanticipated or negative shocks.
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Financial/Nominal factors
• A recession is a direct consequence of over-expansion of credit during expansion 
periods. It gets exacerbated by insufficient money supply and credit availability during 
the initial stages of a slowdown.
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Psychological factors
• Psychological factors include excessive euphoria and overexposure to risky capital 
during an economic expansion period. 
• The 2008 Global Financial Crisis was, at least in part, a result of irresponsible 
speculation that led to the formation of a bubble in the housing market in the US. 
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Impact of a Recession
• Recessions cause standard monetary and fiscal effects credit availability tightens, 
and short-term interest rates tend to fall. 
• As businesses seek to cut costs, unemployment rates increase. That, in turn, reduces 
consumption rates, which causes inflation rates to go down.
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