What is a Recession?

The economy is said to be in a state of recession when the Gross Domestic Product of the nation, falls below 5-10 percent, for two or more consecutive quarters. Although a recession is a relatively lesser downturn in the economy and usually gets resolved fast; yet if not checked in time, it can take the shape of full fledged recession. Now, GDP refers to the total market value of services, goods, investment and labor within a country in a given period of time, which is usually one year.

Recession is seen in different lights by different people. In layman terms it is referred to an inflationary situation, marked by a significant increase in prices, or a deflationary situation, marked by a substantial decrease in prices. Both inflationary as well as deflationary growth is harmful for the economy.

A mild rate of inflation is said to be good for the economy. However, a high rate of inflation is very much harmful for the economy. This is because; an increase in the prices of commodities and services can result in a reduction of public as well as private spending, which leads to a decrease in the GDP of the nation.

On the other hand, a significant decrease in prices of commodities would mean a substantial decrease in income of the people as well. This results in lesser spending by the people, which further aggravates the situation. As this series of event turn into a vicious cycle, The Gross Domestic Product or GDP suffers a blow and the entire economy is dangerously affected.

Now, mild recessions are quite a regular and normal feature of an economy and can be seen in regular intervals. Most people see it as a correction factor, when the markets tend to become overconfident and companies seem to overlook the very basics of the trade. Apart from that, ups and downs in the markets, along with changes in consumption pattern and spending patterns are very much normal. So, it would be wrong to say, that recession is solely caused by these factors. In fact, the role of external factors in offsetting a recession is far more evident.

Perhaps a major cause for the recent recession like condition is the subprime mortgage crisis. Faced by stiff competition, the banks and financial institution made a serious mistake of extending loans and debts to a large number of people without conducting proper check of their credit score. In fact, at times, credit was extended to parties with a long history of poor credit score. This was a fatal mistake, which caused serious setback to the financial sector.

Although these borrowers with poor credit were extended debts at a higher rate of interest, it did little to improve the situation. As the fear of recession began to loom large, panic gripped many markets around the world, causing further damage. However, it needs to be mentioned that, the world economy is much stronger than it was a few years back and therefore, there is always some hope against all odds.