What does recession mean? (Seems like an easy question?)
And how does it differ from depression? (Getting more difficult now?)
The best way to remember it is to adjust them to the real-life situation.
A recession is when your neighbor loses his job. A depression is when you lose your job.
That is obviously only a joke, but can be helpful. Basically, a recession occurs when there is a negative economic growth for at least two consecutive quarters. A depression, on the other hand, is a severe downturn that lasts several years.
A recession can be caused by many reasons and it is difficult to predict. As everything in Economics it is always connected to other causes and explanations. There is never a single and simple answer. In general, every economy has its ups and downs so the situation changes cyclically( the biggest challenge for the government is to keep it as stable as possible). Another cause can be external, for example war or higher oil prices. What is more a recession can be caused also by inflation, currency crisis or low interest rates.
A serious issue is the risk of a recession in an economically small country affecting other economics and becoming global. Not mentioning the effect of the recession in a strong and important country (for example the USA). It not only affects the whole world almost immediately but also creates panic which makes it worse and worse. According to Keynes’ “paradox of thrift” in a recession people have low confidence and spend less, which leads to even deeper problems.
What caused the Recession? As you probably imagine there are more than one answer to this question. Trying to keep it simple, it was a combination of:
- The collapse of derivatives (mortgage-backed security)
- Falling house prices
- Cost push inflation
- Collapse in consumer confidence, geopolitical uncertainties
- High oil prices (and consequently food prices)
The Great Recession in 2008/2009 has affected the entire world economy, with bigger problems in some countries than in others. What is worth mentioning, Poland was the only European country that did not fall into a recession.
That’s what I think.