Key Terms
Recession
A sustained shrinking of an economy's output, identified by convention or declared officially by committee, usually well after the contraction has begun.
By the Investfora Research Desk
A recession is a sustained shrinking of an economy — a period in which total output falls rather than grows. A common convention describes it as two consecutive quarters of falling output, though that is a rule of thumb rather than a universal test. In some places the label is applied officially, by a committee weighing a broader range of evidence, and the declaration arrives in arrears, often well after the contraction began.
A worked example
Suppose a hypothetical economy's quarterly output is indexed at 100, and the next two readings are 99.5 and 99.1. Output fell by 0.5 per cent in the first quarter, then by 99.1 divided by 99.5 minus one — about a further 0.4 per cent — in the second. Two consecutive quarterly falls satisfy the common convention, even though the total decline from the peak is under 1 per cent.
The label records that a contraction happened, not how it felt. It conveys neither depth nor breadth: a shallow dip and a severe slump both qualify, and parts of an economy can grow while the total shrinks. Because dating is retrospective, an economy can also have left a recession before it is declared to be in one.