The term “recession” is one that seems to be cropping up in many financial discussions of late. As our country’s economy experiences continual inflation and consistent interest rate rises the likelihood of a recession increases and becomes a much debated topic.

So, what is a recession anyway? And what does this mean for the country?

By definition, an economy is said to be in recession if it experiences two consecutive quarters of negative growth (or shrinkage).

That is the technical meaning of the word, however, “recession” also has a broader explanation. In general it refers to a downturn of a wide range of economic factors such as spending, business investment and a fall in demand for example.

It is also worth noting that after a prolonged period of economic stagnation the circumstance is generally no longer referred to as a recession and then becomes labeled as a depression.

What causes a recession?

Recessions, and the depressions that can follow, are triggered by many factors. The most common sequence of events that result in “recession” conditions begins with a sustained period of economic growth followed by inflation. Inflation is defined as a general rise in prices as a result of demand outstripping supply. If this inflation is followed by rising interest rates, and as a result of which customer spending is generally reduced, it then becomes harder for companies to raise their selling prices. This in turn, causes economic growth to plateau, or stagnate, and eventually contract.

Recessions can also be caused by the collapse of a speculative bubble. This is a situation whereby people feel richer than they actually are, or similarly, assets are priced at a higher value that what they are worth. 

Possibly the most famous bubble was the dotcom boom of the late 1990’s. In this case the price of stocks increased dramatically based only on the theoretical future business returns provided by the new Internet companies as well as widely available venture capital.

When this bubble eventually burst, approximately US$5 trillion was lost from the market value of technology companies. This resulted in a recession in many developed countries around the world.

Are recessions all bad?

Understandably, the word recession conjures up some unpleasant images of people losing their homes, unexpected business closures and general poverty. However, recessions are an important part of the economic cycle and do not necessarily always have a negative effect on a country’s economic situation.

For example, an economic boom is not always followed by a bust. An economy that experiences a consistent growth for a period of years can either experience a soft, or hard landing.

Interestingly, these terms were originally used to describe the practice of landing a hot-air balloon. In economic terms, a soft landing translates to the process whereby an economy gradually slows to near flat growth without slipping into recession. For the best explanation of a hard landing, just picture the hot-air balloon analogy and that should give you a pretty clear idea!