Recession

Economies tend to move in cycles of expansion and contraction. A recession is a period of contraction, when businesses produce less, people spend less, unemployment rises and incomes fall.

A common rule of thumb is that a recession occurs when real GDP falls for two consecutive quarters. Many official bodies, however, use broader judgments, looking at employment, income, sales and industrial production, and consider how deep, widespread and long-lasting the decline is.

Recessions can be triggered by many things: high interest rates used to fight inflation, financial crises, sudden rises in energy prices, falling confidence or large shocks such as pandemics. During a recession, a fall in spending can feed on itself: lower spending leads businesses to cut jobs, which reduces incomes and leads to even lower spending.

Governments and central banks usually respond by cutting interest rates, increasing public spending or lowering taxes to support demand. For households, recessions highlight the value of emergency savings and manageable debt. For investors, share prices often fall before and during recessions, although markets frequently begin to recover before the economy does.