Output shrinks and jobs grow thin:a recession, the cycle wearing in.
A significant, widespread decline in economic activity lasting more than a few months.
A common rule of thumb is two consecutive quarters of falling real GDP, although official definitions vary by country.
In plain words
A recession is a period in which an economy shrinks instead of growing: output falls, businesses sell less and unemployment tends to rise, across many industries and for more than a few months. A common rule of thumb is two quarters in a row of falling real GDP, which is the total output of the economy adjusted for inflation.
See it move
Peak, then Recession
Why it matters
Recessions bear on interest rate decisions, company profits and government finances, so signs of one, or of one ending, can move currencies, share indices and bonds. Markets tend to react to expectations, often before official figures confirm anything.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
An economy’s real GDP changes by +0.5%, −0.3%, −0.2% and +0.4% in the four quarters of a year.
- 1Second quarteroutput falls by 0.3%.
- 2Third quarteroutput falls again, by 0.2%, the second fall in a row.
- 3Fourth quarteroutput grows by 0.4%.
By the rule of thumb the economy was in recession in the second and third quarters and began to recover in the fourth.
A common mistake
The two-quarter rule is a shorthand, not the official definition everywhere. In some countries a committee or statistical body decides using a wider set of data, and its announcement can come long after the recession began.
Check yourself
Educational information, not investment advice or a recommendation to trade.