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What Is A Recession? What You Should Know

It is hard to escape talk of a UK recession right now. However, if you are unfamiliar with the term, it can be challenging to understand what it means. From the definition of a recession to the causes of one, this blog will help you understand this economic term. Keep reading to develop your understanding.

What Is A Recession?

The simple definition of a recession is “a significant, widespread, and prolonged downturn in economic activity”. However, you can also define it by two consecutive quarters of negative gross domestic product (GDP) growth.

Recession Explained in Key Points

You don’t need to study academic textbooks to understand recessions. Here are the key takeaways to help you digest this economic concept:

What Causes A Recession?

So, that is a recession in simple terms. But what causes one?

There are plenty of economic theories that attempt to explain what causes recessions. Most categorize the causes into financial, economic and psychological themes. However, some only focus on economic changes, such as a surge in oil prices that leads to a recession.

Examples of financial factors include excessive credit growth and corresponding financial risks or the sudden contraction of credit and money supply. Psychological factors include pessimism during downturns and over-exuberance in economic booms.

Can You Predict A Recession?

If you can pinpoint the causes of a recession, can you predict one? Yes and no.

There aren’t any sure-fire predictors of a recession, but there are signs that can strongly suggest that one is on the way. For example, an inverted interest rate yield curve has come before most recessions since 1955. However, each recession tends to have a unique recovery period.

Alongside yield curves, a recession in economics can be predicted by the OECD Composite Leading Indicator, the ISM Purchasing Managers Index or a number of other leading economic indicators.

How To Survive A Recession

After learning about recessions, your next thought will likely be, “How do I get through one unscathed?”

Navigating economic uncertainties can be stressful. There may be job losses, income changes and disruptions to industrial production. UK residents may experience less financial stability and reduced job security.

You can take some steps to protect yourself against these negative impacts. This could be by expanding your emergency fund, reassessing your finances and clearing high-interest debt. Learn more about preparing for a recession here.

What Is A Recession? The Takeaway

Recessions lead to reduced demand for goods and services, job layoffs and spending cuts. These can be difficult times for all UK residents and so understanding the economic definition and impacts is critical if you want to protect yourself.

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