A recession is a pronounced, widespread slowdown in economic activity. It’s usually defined as a sustained period of negative growth in real gross domestic product (output) accompanied by an increase in unemployment rates.
A variety of factors can cause a recession. At the macroeconomic level, a recession is typically caused by a decrease in consumer and business spending combined with a decline in investments by businesses and individuals. The drop in sales and investment reduces the amount of goods and services produced, which leads to lower levels of GDP.
In addition, financial instability – such as a bank crisis or excessive debt – may create a credit crunch that chokes off consumer and business spending. A range of other factors may also contribute to a recession, including supply chain disruptions and price volatility. Unexpected economic events – such as geopolitical conflicts, natural disasters or pandemics – can also trigger recessions by raising costs and reducing consumer confidence and demand.
For those who are employed, a recession can mean reduced hours or pay cuts and an erosion of purchasing power as prices rise. Inflation also eats away at the value of savings and retirement funds.
The higher unemployment that accompanies a recession can also lead to longer-term effects on family income, education, health and social mobility. It can also make it harder to access affordable credit and mortgages, as banks apply stricter lending criteria. It’s important to prepare for a recession by building an emergency fund and paying down debt.