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Technical recession

Date: 15 November 2020 Tags: Miscellaneous

Issue

RBI predicts that India’s economy will contract by 8.6% in the second quarter (July, August, September) of the current financial year.

 

Background

The contraction of Q2 is crucial because it shows India that has entered a “technical recession” in the first half of 2020-21, for the first time in its history.

 

Details

  • When the overall output of goods and services increases from one quarter (or month) to another, the economy is said to be in an expansionary phase.

  • And when the GDP contracts from one quarter to another, the economy is said to be in a recessionary phase. Together, these two phases create what is called a “business cycle” in any economy.

  • There is no universally accepted definition of a recession. The time period for which the economy should contract before declaring it a recession is not distinguished.

  • Commentators often consider a recession to be in progress when real GDP has declined for at least two consecutive quarters.

  • That is how real quarterly GDP has come to be accepted as a measure of economic activity and a “benchmark” for ascertaining a “technical recession”.

  • Typically, recessions last for a few quarters. If they continue for years, they are referred to as “depressions”.

 

Slowdown

An economic slowdown occurs when the rate of growth in the GDP of an economy slows from the previous period. An economic slowdown is a natural part of the business cycle. 

 

Recession

  • A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline.

  • Recessions are characterized by a rash of business failures and often bank failures, slow or negative growth in production, and elevated unemployment.

 

Depression

  • A depression is a severe and prolonged downturn in economic activity. A depression is commonly defined as an extreme recession that lasts three or more years or which leads to a decline in real gross domestic product (GDP) of at least 10% in a given year.

  • Depressions are relatively less frequent than milder recessions, and tend to be accompanied by high unemployment and low inflation.