min read
· Posted on
February 21, 2024

What’s a recession and how does it happen?

We keep hearing the word recession with prices rising...but what exactly is a recession and are we in one?

What's the key learning?

  • Technical definition of a recession
  • What is GDP?
  • The symptoms of recession
  • The symptoms of recession we're seeing now

The word “recession” is a scary word in any context. Recession of gums (trust us, it ain’t pretty), recession of your hairline, and of course recession of the economy.  

It’s a bit like Harry Potter, where everyone was too scared to say Voldemort’s name, because they’re so scared of the nose-less dude himself.

Even though we don’t like talking about scary things, it’s important to do so to know what we might need to expect in the future…or simply to learn from the past.

So, what’s a recession?

A recession is a period of time when the economy isn’t doing very well. Think of it like the economy falling sick.

There’s no single, exact definition of recession, but it is essentially a sustained period of weak or negative growth in the economy.

But how do we know we’re in a recession if there’s no definition. 

Well, technically there is a definition. It’s called “the technical definition”. 

In other words, when there are two back to back quarters (3 month periods) of negative growth in real GDP. That’s a technical recession.

GDP is a measure of total economic output that economists use to help measure how healthy the economy is. We go into what GDP is in a bit more detail here - check it out.

It’s not always easy to predict if a recession is about to happen or not, you usually only see it once it’s there. 

But just as there are symptoms of an illness, there are symptoms or indicators of a recession that help us get an idea of where the economy is headed.

What are the “symptoms” of a recession?

When people and businesses are unsure where the economy is going, they tend to opt for the safest route; spending less, and saving more.

So, there are a number of major “symptoms” of a recession like:

  • A drop in household spending
  • A drop in investments made by businesses
  • The unemployment rate also tends to move up in the lead up to recession

The last time there was a major recession that impacted Australia was the 2008 Global Financial Crisis that began in the United States.

It was the most intense financial crisis since the Great Depression in the 1930’s.

Now, we’re not seeing anything like that yet. While we’re currently seeing a small drop in household spending and investment, we haven’t yet seen a drop in unemployment.

Now you’ve got an idea of what a recession is, check out part-two of this article series, “What happened in the 2008 Global Financial Crisis” where we look at what happened last time there was a full recession in Australia and what we’re seeing in the economy right now.

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