Recession in focus: Economic decline: when does one speak of a recession? | news
• Different definitions
• Characteristics and signs
The price pressure is still high – and the central banks are reacting: In order to get the high inflation under control, the US Fed heralded the turnaround in interest rates in spring 2022 and raised the key interest rate for the first time since December 2018. Since then, there have been a number of other increases. The European counterpart, the European Central Bank (ECB), also followed the Fed’s approach and has meanwhile increased interest rates. However, numerous analysts warn that the tight monetary policy monetary authorities will plunge the economy of the USA and Europe into a deep recession.
What is a recession?
It is relatively easy to determine whether a country’s economy is growing, stagnating or declining using economic data, above all gross domestic product (GDP). But when does one actually speak of a recession? In order to answer this question, it should first be clarified what the term exactly describes. According to the Gabler Wirtschaftslexikon, a recession is a phase of the economic cycle in which there is a slight weakening of economic activities, which is recognizable at least in some areas of an economy, if not in all. In contrast to a depression, which was triggered in the USA in the 1930s by “Black Thursday” on Wall Street and led to the global economic crisis, the downturn in a recession is limited.
Rule of thumb: two negative quarters
But how can you tell if a recession is already in full swing? “With at least two consecutive negative quarters, we are dealing with a technical recession by definition,” explains Dr. Fritzi Koehler-Geib. Accordingly, two declining quarters in a row do not just correspond to a short phase of weakness. However, the Associated Press news agency emphasizes that this is not an official definition, but a rule of thumb – with admittedly high accuracy. According to American Enterprise Institute economist Michael Strain, the US economy has slipped into recession for the past 10 consecutive quarterly declines.
Measured economic utilization
Economic researchers in Germany, on the other hand, define a recession based on economic capacity utilization. For this purpose, the production potential is measured, for the calculation of which it is assumed that all currently existing workers and operating resources in an economy are used optimally. However, this is not the case in crisis situations: Production is below potential, which weakens economic output. If this underutilization increases for two consecutive quarters, economic institutes speak of a recession.
US definition differs
In the US, on the other hand, the National Bureau of Economic Research (NBER) has declared a recession. The research body does not speak of two consecutive quarters, but of “a significant contraction in economic activity that spreads across the economy and lasts longer than a few months”. The key factors considered for the NBER are data on real income minus government transfers, employment, various forms of real consumption expenditure and industrial production. According to a letter from the US government, the organization has given the areas of income and employment more weight in the assessment in recent decades, but there are no fixed threshold values.
Since economic data is also published with a delay, the NBER only speaks of a recession when it has already begun. According to the Associated Press, this has not been the case for up to a year in the past.
What factors point to a recession?
So in order to assess promptly whether the economy is heading for a recession or is already in one, it can be worth keeping an eye on a few signs. According to the agency, it is a warning sign if job losses are steadily increasing and unemployment is rising at the same time.
The “Handelsblatt” also mentions a drop in demand among consumers and companies, which in turn leads to bulging warehouses. In general, fewer investments are made and salaries and prices are falling. More companies are registering short-time work or even laying off their employees entirely. In addition, falling stock prices can be a warning signal.
The trading portal IG also refers to the bond yield curve. Bonds with longer maturities generally bring investors higher returns than those with short maturities because the interest rate risk is significantly higher. However, in uncertain times, such as when investors anticipate the onset of a recession, the demand for higher yields for shorter bonds increases, inverting the yield curve. According to the portal, buyers of bonds assume that short-term government bonds are riskier than those that will only expire in the coming years or decades. This could actually be an indication of a recession.
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