Q&A: What is a recession?

23 Oct 2008, 7:59 am   -   Source: SBS, NBER, About.com
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There has been a lot of talk of recession - in the US, Britain and globally. So what does it mean, and are we likely to have one in Australia?

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There has been a lot of talk of recession - in the US, Britain and globally. So what does it mean, and are we likely to have one in Australia?

One standard definition of recession is a decline in the real GDP (Gross Domestic Product) for two or more consecutive quarters.

Economists tend to prefer a definition that takes into account other economic indicators like unemployment and consumer confidence.


The US Business Cycle Dating Committee at the National Bureau of Economic Research uses several indicators including business activity in the economy, employment, industrial production, wages and retail sales. It defines a recession as the time when business activity peaks and starts to fall until business activity bottoms out. Typically a recession will last about one year.

The NBER defines a recession as 'a significant decline in economic activity spread across tee economy lasting more than a few months, normally visible in real GDP, real income, unemployment, industrial production and wholesale-retail sales.'

So what's a depression?

Technically a depression is a recession that lasts longer and shows a bigger decline in business activity. Typically a depression will have more than a 10 per cent drop in GDP. The US Great Depression of the 1930s fits the bill.

Can we avoid recessions?

Some economists say that recessions are part of the business cycle and are unavoidable. Sometimes there are distinct reasons like, the subprime housing crisis in the US which led to a credit squeeze. Some economists say recessions are necessary because they 'trim the fat' and the economy becomes 'more efficient'. But not all agree.

In very basic terms: for one reason or another people reduce their spending. Therefore there's less demand for goods. Companies reduce output, which over time can mean a reduction in jobs. Fewer jobs means less wages in the economy, therefore less consumption. And so on.

How will it affect me?

In a recession jobs become harder to get, therefore wage increases might slow down. When unemployment rises people will start to tighten their belts. There would also likely be an increase in the number of businesses that fail. Interest rates would likely go down, but house prices could dip too. Other countries, such as the UK, have experienced massive drops in house prices, meaning many home owners are left with 'negative equity' (meaning what they owe the bank in a mortgage is more than the value of their property).

The government has said recently that Australia would likely avoid a recession.

Is Australia likely to have a recession?

Two of Australia’s leading banks, ANZ and National Australia Bank say Australia can avoid a recession but added economic conditions ahead will be tough.

ANZ Chief Executive Mike Smith believes the nation will escape negative economic growth conditions because it is closely aligned with regional powerhouse China.

Those sentiments were endorsed by National Australia Bank Chief Executive John Stewart.

The next GDP figures due for Australia will be the September quarter, which will be released on December 3.

According to the Australian Bureau of Statistics, in the June 2008 quarter, Australia's GDP grew by 0.3 per cent. The previous two quarters both showed a growth of 0.7 per cent. This shows the economy is growing, but the pace of growth has slowed.

What about the US and Britain?

The United States and Britain are said to be teetering on the edge of recession.

The National Institute Economic Review’s latest quarterly forecast said the British economy will confront its first full-year recession since 1991.

The NIER said the economy will contract in the second half of 2008 and GDP will fall by 0.9 per cent the following year.

The main drivers behind a recession would be a drop in consumer spending and a plunge in housing and business investment.

In the UK, the second quarter of 2008 showed flat growth, the previous quarter showed 0.3 per cent growth.

Prime Minister Gordon and Britain’s central bank chief, Bank of England Governor Mervyn King have both said the country will likely enter a recession.

And the focus on the US for many economists shifted away from the prevention of a recession to the length and intensity of an inevitable recession.

In the US, the last quarter of 2007 showed negative growth. This period was followed by two quarters of growth in GDP in early 2008. But a significant slowdown is now predicted.

Economists from the Swiss bank UBS expect the recession to start in the United States from the second half of 2008 and last until the middle of next year.

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