What is an economic recession? It seems like everyone is talking about it lately, and it’s important to understand its causes and how it affects us.
Economic fluctuations constantly occur in markets around the world.
This event not only changes market dynamics, but also affects various sectors of society, from businesses to households.
The consequences of a recession go beyond a simple decline in economic growth, impacting employment, consumption, investment, and more.
Have you ever wondered how this process affects your daily life? Keep reading to understand its effects and how it is managed on a global scale.
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What is an economic recession?
According to the International Monetary Fund, a recession occurs when economic activity significantly declines over a sustained period.
While there is no official definition, it is commonly considered to happen when GDP falls for two consecutive quarters.
Recessions can cause widespread economic hardship, such as job losses, falling incomes, and reduced business profits.
They may result from various factors, including high inflation, low consumer confidence, or external economic shocks.
To respond to a recession, governments and central banks typically implement fiscal and monetary policies to stimulate growth.
What are the causes of a recession?
The causes of a recession are diverse and often interconnected, involving economic, financial, and psychological factors.
One of the most common causes is a decline in consumer and business confidence.
When people fear for their economic future, they tend to cut spending, which affects the demand for goods and services.
Structural changes in key industries, such as technology or energy, can also lead to drops in production and employment.
Economic shocks—like sudden increases in oil prices or global financial crises—can also trigger a recession.
At the macroeconomic level, central bank policies can slow down growth and inadvertently cause a recession.
Psychological factors, such as widespread pessimism, also play a key role in reducing economic activity.
What Could Happen During a Global Recession Explained in 5 Key Points
What is an economic recession and what are its consequences? Discover the 5 key points that can shape the global economy:
1. Rise in Unemployment
During a recession, the lack of demand and a drop in investment lead many companies to reduce their workforce.
This happens because operational costs increase without a proportional rise in sales.
Unemployment is a direct result of these business decisions, as companies aim to cut expenses to stay afloat.
Moreover, fear of a recession often makes businesses more cautious about hiring, further increasing unemployment rates and affecting both economic and social stability.
2. Counterproductive Saving
Although saving is generally a good habit, during a recession it can become counterproductive.
When consumers feel financially insecure, they tend to save more, cutting back on spending.
This worsens the recession, as reduced consumption lowers market demand, decreases business revenue, and deepens the economic slowdown.
As a result, higher saving rates can actually hinder economic recovery during a recession.
3. Decline in Manufacturing and Services
In a recession, businesses face lower demand for their products and services, leading to a reduction in production and service delivery.
This directly affects manufacturing, as factories produce less and may even shut down temporarily.
Sectors like tourism, entertainment, and consulting also suffer due to declining demand.
This drop in economic activity can lead to an even deeper contraction, especially as the most affected industries continue to slow down.
4. Sudden Price Reductions
During a recession, low demand puts downward pressure on prices of goods and services.
Companies, in an effort to stay competitive and clear inventory, often lower prices, leading to deflation.
While this may benefit consumers in the short term, a sustained drop in prices can be a sign of a shrinking economy.
5. Liquidity Dries Up
A common effect of recessions is a lack of liquidity.
Financial institutions, facing increased risk, become more cautious with lending.
This results in less available credit for both consumers and businesses.
Companies that rely on loans for operations or growth may struggle to secure funding.
At the same time, consumers face tighter credit conditions, which limits both spending and investment, prolonging the recession and slowing economic recovery.
How Long Do Recessions Last?
Now that you know what an economic recession is, you’re probably wondering how long it can last.
Well, the duration of a recession depends on several factors, such as the nature of the crisis, the policies adopted to mitigate it, and the market’s response.
In general, recessions can last from a few months to several years.
In the United States, the average post-World War II recession has lasted around 11 months, but deeper recessions—like the one in 2008—lasted over a year.
The speed of recovery depends on factors like government intervention, monetary policy, and confidence in the economic system.
However, even after a recession officially ends, its economic effects can linger.
Recession vs. Economic Depression
An economic depression is a prolonged and severe downturn in the economy.
It occurs when economic activity falls significantly over an extended period.
That’s why it’s important to distinguish between a recession and a depression.
Unlike a recession, which can last from a few months to a couple of years, a depression has deeper implications.
These include a more severe GDP contraction, massive unemployment, a sharp decline in consumption and investment, and crises in financial systems.
This phenomenon is often triggered by financial crises, poor economic policies, or global shocks like wars or natural disasters.
Is a U.S. Driven Economic Recession Coming?
There is growing concern about the possibility of a U.S. driven economic recession, fueled in part by Trump’s tariffs.
On April 2, 2025, Trump announced a significant increase in tariffs, raising the average effective rate to about 23%—nearly ten times higher than the previous year.
This move has generated economic uncertainty, impacting both businesses and consumers.
According to an Axios report, the tariffs have led to economic slowdown, higher inflation expectations, and a stagflation outlook approaching recessionary territory.
Additionally, nearly 900 economists signed a letter warning that these policies could lead to a “self-inflicted recession.”
They noted that tariffs are a burden on American workers due to higher prices.
While some sectors hope for long-term benefits, the current uncertainty and signs of economic slowdown suggest that a recession may be on the horizon.
What Is the Long-Term Impact of Trump’s Tariffs?
The long-term impact of the tariffs implemented by former President Donald Trump could be significant and multifaceted.
According to an analysis by Harvard Business Review, the increase in tariffs to an average effective rate of 23% has generated global economic uncertainty, affecting both financial markets and business confidence.
This measure could prompt companies to adjust their supply chains and investment strategies in an effort to mitigate risks associated with higher costs and trade barriers.
Additionally, the implementation of tariffs could trigger retaliatory trade measures from other countries, further escalating tensions and affecting international trade.
So, what is an economic recession? You already know it.
We invite you to continue exploring how this phenomenon impacts the global landscape—and how economic decisions can shape the world’s future.