What is a recession? | CNBC Explains - YouTube

The last time there was a global recession was in the late 2000s.

The scale and timing of that Great Recession, as it’s now known, varied from country to country.

But on a global level, it was the worst financial crisis since the Great Depression.

Now a decade on, some people are worried the next worldwide downturn may be just around the corner.

While there is no universally accepted definition of a recession, a technical recession is a

decline of Gross Domestic Product, or GDP, for two consecutive quarters.

That means the value of all the goods and services

produced in a country went down for six months straight.

But the U.S. National Bureau of Economic Research,

which tracks the start and finish of each U.S. recession,

says a recession can begin even earlier than that.

The bureau measures and collects monthly data for four other areas in addition to GDP:

real income, employment, manufacturing and retail.

If these economic indicators decline, it’s likely GDP will too.

Now, a recession is not the same as stagnation, that’s simply a period of low or zero growth.

Nor is it a depression, which is a more severe decline that lasts several years.

Between 1960 and 2007, there were 122 recessions in 21 advanced economies.

This may sound like a lot, but those economies were really only in recession for around 10% of the time.

Each recession is unique, but they often share several characteristics.

Recessions usually last about a year, and a country’s GDP typically falls around 2%,

although in some severe cases, that decline can hit five percent.

Investments, imports and industrial production normally drop, and financial markets frequently face turmoil.

All this can have a very negative impact on a country’s population.

Many people lose their jobs and if they can’t afford their mortgages,

they lose their homes and house prices drop.

They also have less money to spend in shops and restaurants.

That means businesses make less money, and many go bankrupt.

So is there a way to spot a recession before it hits?

Some economists focus on the number of people employed in the manufacturing sector.

In the world of manufacturing, orders are often booked months in advance.

When a factory or company gets fewer orders, they’ll stop hiring new workers

and potentially lay off some existing workers too.

This is a good sign other parts of the economy will slow as well.

Other experts examine the government bond market, to see how willing investors are

to lend money to governments over a long period of time.

When investors are concerned the economy might be slowing down, they often sell their shares

in public companies, and instead loan their money to governments by buying bonds.

That’s because bonds are usually seen as a less risky investment.

So those are the warning signs of a recession.

But what actually causes them?

A healthy economy has lots of money flowing through it.

Company owners are putting money into their business and hiring more people.

Consumers are spending money on their products and services.

But if businesses and consumers stop spending that money,

less money flows through the economy and growth begins to slow.

A few factors can block that flow of money.

One of those is high interest rates.

When rates are high, people get more money for putting their savings in a bank account,

but they also end up having to shell out more to get a loan.

This can encourage people and businesses to save more and borrow less, causing their spending to fall.

Consumer confidence is a way to measure people’s psychological approach to money.

Economists track this closely.

Low levels of consumer confidence means people are worried about the economy,

and that can cause them once again to hold on to their money, rather than invest or spend it.

A stock market crash for example is one of the most sure-fire ways

to shake up consumer confidence across the board.

But inflation may be the biggest factor.

It causes the prices of goods and services to increase.

If your paycheck isn’t growing alongside it, that means you’ll have to cut back and buy fewer things.

When this happens, people and businesses once again tend to reduce spending and save more.

And an economic slump that starts in one country can spread beyond its borders,

creating a domino effect.

Let’s explore an example, the 1997 financial crisis in East and Southeast Asia.

It began in Thailand when the value of the country’s currency, the Thai Baht, collapsed.

Investors had lost confidence in the country,

and that lack of confidence contaminated the rest of the region.

Travelers face strict limits on the amount of currency they can take out of the country.

Other Asian currencies like the Malaysian ringgit and Indonesian rupiah began to lose value too.

Soon, investors around the world had become reluctant to lend money to any developing country.

More recently, the trade war between the U.S. and China has also affected many other parts of the world.

These two economic superpowers produce and sell about 40% of all global output,

and economists worry the knock-on effects from their continued conflict

could create the next major international recession.

Take Germany for instance.

Its economy is largely built upon exports.

It makes money by building machinery and equipment and sending it abroad to other countries like China.

But if China anticipates less demand for its products from the U.S. because of the trade war,

it’s going to order less of that machinery from Germany to make them.

Germany is the biggest economy in the Eurozone, which means if it goes into a recession,

the rest of Europe will likely suffer too.

Some experts say that the financial crisis in 2008 ushered in a new era of deglobalisation.

That means nation-states are less focused on international trade,

and more focused on their domestic economic agendas.

They say all this could lead to more frequent recessions.

And because of that, these experts believe we should reconsider

what constitutes economic success in developed countries.

Total debt burdens will rise.

Populations will fall, as will the productivity of our workers.

And so it’s unrealistic, they say, to think that growth rates

can continue to rise in the way they did in the second half of the 20th century.

They suggest an alternative approach is to focus on economic satisfaction and contentment,

with a number like per capita income growth.

This essentially measures how much money the average person makes.

While the warning signs are there for another global recession, geopolitical tensions and

deglobalization makes it even more difficult to predict the future.

But one thing’s for sure, we’re living in a new age of uncertainty.