A recession is defined as two consecutive quarters of negative growth in the GDP. In simple terms, a recession occurs when an economy experiences a significant and prolonged decline in economic activity.
This decline is often measured by a decrease in the country’s total production value of goods and services, known as the gross domestic product (GDP).
The National Bureau of Economic Research (NBER) measures recessions by looking at nonfarm payrolls, industrial production, and retail sales, among other indicators.
How do recessions happen?
● Prolonged fluctuations in the costs of inputs, goods, and services utilized in the production process can potentially lead the economy into a recession. For instance, a significant surge in oil prices may serve as an early indicator of an impending economic downturn.
● A country might enter a recession when it deliberately tries to lower inflation through measures like tightening the money supply or cutting government spending. Economic downturns can result from such decisions to control inflation using monetary or fiscal policies.
● The rapid rise in asset prices and a fast credit expansion typically align with the quick buildup of debt, ultimately it will result in a weak economic downturn.
● Recessions often happen when there’s less demand for goods and services from other countries, particularly in places that heavily rely on exporting. The negative impacts of recessions can be significant, especially for larger economies.
Two of the largest economies in the world have officially entered a recession, according to the latest data released on Thursday, February 15, 2024.
Japan
Here are a few reasons why Japan, the world’s third-largest economy, entered a recession.
● Japan’s GDP contracted by 0.4% in the fourth quarter of 2023, following a 3.3% decline in the third quarter
● The Japanese yen lost 30% of its value against the US dollar in 2022, mainly because the Bank of Japan chose not to increase interest rates, unlike the Federal Reserve. This decision made the yen less appealing to foreign investors looking for better returns.
● Due to the Bank of Japan’s reluctance to raise interest rates, the yen became less attractive to foreign investors, leading to a surprising contraction in Japan’s GDP.
● The country’s weak currency and aging population further contributed to the economic decline, impacting its traditionally export-driven economy.
United Kingdom(UK)
● The UK’s GDP shrank by 1.4% in the fourth quarter of 2023, following a 0.3% decline between October and december quarter, That officially put the UK into recession.
● In October 2022, UK inflation shot up to 11%, but now it’s down to 4%. Still, the high cost of living is made harder for people in the UK to afford things, reducing their ability to spend money.
● The Bank of England increased interest rates to tackle inflation. This resulted in more expensive loans and less spending by consumers.
● Because people in the UK spent less due to inflation and pricier loans, the economy only grew by 0.1% in 2023. This was the slowest growth since 2009.
● As a result, there was a drop in manufacturing, construction, and wholesale sectors in the UK. These areas were the main reasons for the country’s economic slowdown, along with disruptions in the supply chain.
The UK and Japan faced economic downturns due to certain factors, leading to recessions. In contrast, the US economy not only sidestepped a recession but also grew by 3.3% annually in the fourth quarter of 2023.
Written by Omkar S Chitnis
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