A recession is one or more consecutive years of negative real GDP growth. The opposite of recession is expansion where there a year or more of positive growth is experienced.
The world economy has experienced significant slowdown in the early 1990s. Business cycles are always present in market-oriented economies. Arthur Burns (1947) wrote: "For well over a century, business cycles have run an unceasing round. They have persisted through vast economic and social changes; they have withstood countless experiments in industry, agriculture, banking, industrial relations, and public policy; they have confounded forecasters without number, belied repeated prophecies of a "new era of prosperity" and outlived repeated forebodings of "chronic depression. The same observations could be made today” (World Economic Outlook, 2002).
Business cycles are important in determining the levels of recession in a country"s economy. It is defined as recurring chain of growth and recessions in the level of economic activity. It also means cyclical rise and fall in economic activity around a trend particularly its growth cycle, where the growth rates are high and level recessions are rare (World Economic Outlook, 2002).
Business cycles in industrial countries after 1973 are characterized by lower growth rates and common level recessions. Growth cycles depend on subjective distinction between trend and cycle, and key cyclical characteristics depend largely on which detrending method is used. Level cycles can also be determined using output per capita, which is a better measure of welfare and clearly recognizes that high growth rates of output are sometimes caused by rapid population growth. In practice, output per capita recessions in industrial countries after 1973 were similar to output recessions, as population growth rates were generally low (World Economic Outlook, 2002).
Business cycles in industrial countries from 1973 to 2000 have generally milder recessions and longer period of growth or expansions; synchronized recessions are a common feature of the international and historical experience; and investment is playing a larger role in recessions now than in the late nineteenth century. Analysis indicates that investment contractions and stock price declines are more synchronized than recessions; that investment contractions make important contributions to recessions but upturns in consumption tend to drive recoveries; and that cycles in interest rates and output in G-7 countries are closely related (World Economic Outlook, 2002).
There are four distinct periods of recession as indicated by the business cycles. These four are divided by major world events: the prewar period before World War I (1881-1913); the interwar period between the World Wars (1919-38); the Bretton Woods period between World War II and the productivity slowdown, the oil shocks, and the move to generalized floating of exchange rates in the early 1970s (1950-1972); and the post--Bretton Woods period (1973-2000) (World Economic Outlook, 2002).
The American National Bureau of Economic Research defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months" (Wikipedia, 2007).
Causes of Recessions
The precise causes of recession are the subject of fierce debate among academics and policy makers although most would agree that recessions are caused by some combination of internal recurring forces and external shocks. For instance, Keynesian economists and Real business cycle theorists may disagree on the causes of business cycle breakdown, but all would agree that purely external factors such as oil price, the weather, or a war could casue either temporary recession or economic growth (Bleaney, 1985).
Keynes pointed out that when interest rates get too low - below 2% - then people are not attracted to save money in the bank. Instead they hold money for other transactions. If there are no savings, banks could not extend loans, drying up savings and loans in the long run which would cause a business cycle to break down, according to Keynes.
Austrian school economists hold that it is an inflation of the money supply that causes modern recessions. They also see recessions as positive forces that naturally undo misallocation of resources during the boom or inflationary phase (Goldstein, Morris & et al, 1994).
Most monetarists believe that the cause of most recessions in the United States is mishandling of the money supply, while an extreme change in the structure of the economy are responsible for very few (Kindleberger, 1997).
The banking systems in forty or fifty countries such as Japan, Mexico, Finland, Sweden, South Korea, Thailand, Russia, and Brazil collapsed in one of three waves; the first wave began in 1982 in Mexico and many other developing countries, the second wave began in 1990 and included Japan and Sweden, and third wave began in 1997 and included Thailand and its neighbors in South Asia as well as Russia.
The combined loan losses of the banks in some of these countries comprised around
thirty to forty percent of the annual government budgets in most of these countries.
