The IMF thinks the entire world economy will shrink by 3% this year, which will be the biggest recession since the great depression. But what is a recession? A recession is best defined as a ‘decline in economic activity’ that lasts for more than 2 three month periods, or 2 quarters. Economic activity is measured through a country’s GDP or Gross Domestic Product, and I have another video on that if you want to check it out.

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When the economy is growing, there are more jobs to go round, and the government thus gets more money from taxation to spend on tax cuts, investment to business, and on public services, all of which cause more economic growth. However during a recession, those in work may lose their jobs, or graduates find it harder to get jobs. This means people spend less, so governments will get less in through taxation and the government may not be able to pay for public services, or they go into debt to pay for them

But why do recessions occur? There are many causes to a recession, in this video I’ve chosen the five most common causes. Firstly recessions can be caused by economic shock which is when an unpredictable event suddenly causes a recession. A good example of this is the current crisis we’re in. Due to Coronavirus, governments had to close businesses and stop people from going to work, which forced the world economy into a recession. Another example of this is the 1973 oil crisis, which is when OPEC, or the Organisation of Petroleum Exporting Countries, forced oil prices up by 400% which caused a worldwide recession, albeit only in the short term. Recessions can also be caused by debt being too high. This is what caused the 2008 financial crash, which led to the UK GDP falling by 7.2%. Mortgages, which are loans given to people by banks so that they can pay off the houses, were being given to millions of people who couldn’t actually pay them, when those people couldn’t pay, and the banks lost all the money lent to people, they were forced into shutdown essentially stopping people from being able to access their money, leading to a recession

Thirdly recessions can be caused by inflation or deflation. Inflation is the process by which prices naturally rise over time as more money is printed by central banks. However when prices rise faster than wages, central banks might increase the interest rate, which is an incentive people to save and take money out of the economy,thus depressing economic activity, leading to a recession. On the other hand recessions can be caused by deflation, which is the opposite of inflation. Deflation is when prices and wages decline, leading to people and businesses spending less. Recessions can also be caused by economic bubbles bursting. Economic bubbles are created when investors get very optimistic about something and invest a lot more into something than they normally would, because they want a piece of the action. A good example of this is with the internet in the late 90s, investors would literally invest in any business that had a dotcom in its name. Secondly, investors suddenly get cold feet and lose confidence and suddenly start selling their stocks, as everyone follows suit the price of stocks quickly diminishes, and as companies lose stock they start laying off people leading to a recession. Finally recessions can be caused by technological change making certain professions obsolete. For example the industrial revolution caused many craft workers to lose their jobs as machines replaced them. Some have argued that AI will have a similar effect in the near future.

So what steps do governments have to take to come out of a recession? More generally, recessions tend to force governments to spend more on public services to support the unemployed as well as in certain industries to keep them afloat, like manufacturing. This is partly done to avoid depressions, which is when much higher unemployment and falls in GDP occur. Recessions can also lead to the inverse, austerity measures which means governments cut their spending on public services and investment in an attempt to bring debt under control. There is even a school of thought that maintains that recessions are a naturally occurring part of the economic cycle and governments should not intervene at all to deal with them.

Sources: https://docs.google.com/document/d/e/...