What is an Economic Recession?
The GDP is a good example and, perhaps, the best known indicator to identify a recession…
Economic activity over time can suffer certain fluctuations due to internal and/or external factors, but how do we really know when we are in a recession? Before addressing the definition, let us remember the economic cycles (in this example with contraction) which are made up of 4 phases:
When studying economic cycles, something very difficult to identify is the beginning of a recession stage and the period in which it ends, for which its impact can be so serious that, the longer it lasts, it causes more uncertainty in each of the sectors. of the economy. However, we must consider that the beginning of a recession begins at the maximum point of a classic cycle and ends at its lowest point, so this concept takes many formalities among authors, so its understanding becomes somewhat complicated.
Beginning in the 20th century, an academic organization called the National Bureau Economic Research (NBER) has earned the trust in the United States and around the world by studying business cycles like no other institution, since its founding in the year 1920, therefore, his definition of the term recession is, perhaps, the most important at the international level and indicates it as:
“A significant decline in economic activity that spreads across the economy as a whole, that lasts for more than a few months, and that is typically visible in real GDP, real income, employment, industrial production, and sales retail and wholesale. – NBER.
Given this definition, we have heard, on several occasions, that a recession is the fall in economic activity in two consecutive quarters, therefore, it could be somewhat misleading and with little theoretical support, for which it only works as an approximation to such event.
This concept has been widely accepted, although its application may not have the same scope as in the United States, given the types of indicators that are presented, methodology, scope and periodicity in other countries, such as Nigeria.
How does it affect Nigeria and the rest of the world?
Following the principle of the NBER, taking as an example an indicator which is a component of the economy as a whole. The GDP is a good example for this occasion, perhaps the most well-known indicator for all people since it presents the total produced in an economy in a period of time published with original series and seasonally adjusted, and which reflects the current condition of the economy. These characteristics describe it as a coincident indicator, as it directly affects the foreign exchange and variable markets (inversely, the bond and money markets) and can be measured either on the spending, income or production side.
To exemplify, we will take the measurement on the expense side, which is made up as follows:
Aggregate Demand= C+G+I+V+(XI)
G= Public expenditure
V= Change in inventories
X-I= Exports minus imports
However, each of these components play an important role since, as we mentioned before, once falls below potential occur, we will be able to perceive in the medium term how consumption can decrease, foreign investment, and therefore effects on the market. internal (given that the economic slowdown will lead companies to produce less, reduce other factors of production such as labor and therefore the effects will be reflected in the labor market and social conditions). It should not be forgotten that the growth of the indicator is measured at constant prices (this means that it makes an adjustment by eliminating the variation in prices).
For economies with a high scale and development, a recession implies a danger of contagion with a high possibility of propagation to the point of impacting the exports and imports of a country and presenting imbalances in its trade balance.
What measures are applied under these circumstances?
Ultimately, once the economy has suffered a fall as a whole, the monetary policy applied by the central bank of each country plays an important role in eradicating this slowdown phase under an accommodative policy and together with an expansive fiscal policy to induce spending.