What Is a Recession?
A recession is typically defined as asustained period of economic decline, generally marked by a fall in grossdomestic product (GDP) over two or more consecutive quarters. But a recessionis more than just a number. It signals widespread economic stress, with joblosses, reduced consumer spending, and weaker business confidence.
During a recession:
- Economic activity contracts: Consumers and businesses cut back on spending, leading to slower sales and reduced production.
- Unemployment rises: Companies often downsize or freeze hiring in response to falling revenue.
- Consumer confidence declines: Households spend less, delay major purchases and prioritise saving.
- Businesses struggle: Smaller or highly leveraged businesses may fail as credit tightens and demand weakens.
Although recessions vary in length andseverity, the average Australian recession tends to last less than a year, withlong-term economic recovery typically following soon after.
Causes of a Recession
There is no single trigger for a recession.Instead, they tend to emerge from a combination of internal economic weaknessesand external shocks.
Common recession drivers include:
- High interest rates: When borrowing becomes more expensive, both businesses and households reduce spending and investment.
- Financial market instability: Banking crises, sudden asset price collapses or credit crunches can undermine confidence and limit access to capital.
- External shocks: Events such as pandemics, wars, or surging commodity prices (particularly oil) can disrupt trade, raise costs and reduce global demand.
- Government policy errors: Poorly timed fiscal or monetary decisions can exacerbate existing vulnerabilities.
In many cases, recessions are part of thebroader business cycle and serve as a correction mechanism to recalibrateimbalances built up during periods of expansion.
How Recessions Unfold: The Economic Cycle
Recessions do not occur randomly. They areembedded within the business cycle, which typically consists of four keystages:
- Expansion: Economic output grows, employment rises and investment flourishes.
- Peak: Growth begins to level off as the economy reaches capacity.
- Contraction (Recession): GDP falls, unemployment increases and consumer demand declines.
- Recovery: Economic activity resumes, investment picks up and confidence returns.
During the contraction phase, investorsoften shift capital into defensive sectors or safe-haven assets, while centralbanks and governments may introduce stimulus to hasten recovery.
How to Identify a Recession Early
Recognising the early warning signs of arecession can help investors and businesses prepare before the downturndeepens. Some of the most common leading indicators include:
- Negative GDP growth: A decline in the nation’s economic output is a central marker.
- Rising unemployment: A consistent increase in jobless claims typically reflects slowing business activity.
- Falling consumer confidence: When households become pessimistic about the future, they reduce spending.
- Declining manufacturing and retail sales: Weaker demand leads to a pullback in production and sales activity.
- Flattening or inverted yield curves: Bond markets may signal recession when long-term yields fall below short-term ones.
In Australia, data from the AustralianBureau of Statistics (ABS) and Reserve Bank of Australia (RBA) are key sourcesfor monitoring these indicators.
