What is a recession? | CNBC Explains

The last time there was a global

recession

was in the late 2000s. The scale and timing of that Great Recession, as it is now known, varied from country to country. But globally, it was the worst financial crisis since the Great Depression. A decade later, some people fear that the next global crisis is just around the corner. While there is no universally accepted definition of a

recession

, a technical recession is a decline in the Gross Domestic Product, or GDP, for two consecutive quarters. That means that the value of all goods and services produced in a country fell for six months in a row.

But the U.S. National Bureau of Economic Research, which tracks the start and end of every U.S. recession, says a recession can begin even earlier. The bureau measures and collects monthly data for four other areas in addition to GDP: real income, employment, manufacturing and retail trade. If these economic indicators decline, GDP is likely to decline as well. Now, a recession is not the same as stagnation, it is simply a period of low or no growth. Nor is it depression, which is a more severe deterioration that lasts several years. Between 1960 and 2007, there were 122 recessions in 21 advanced economies.

This may seem like a lot, but those economies were actually only in recession about 10% of the time. Each recession is unique, but they often share several characteristics. Recessions usually last about a year and a country's GDP typically falls by about 2%, although in some severe cases, that drop can be as much as five percent. Investments, imports and industrial production typically fall, and financial markets frequently face turbulence. All of this can have a very negative impact on the population of a country. Many people lose their jobs, and if they can't pay their mortgages, they lose their homes and house prices fall.

They also have less money to spend in stores and restaurants. That means companies make less money and many go bankrupt. So is there a way to spot a recession before it hits? Some economists focus on the number of people employed in the manufacturing sector. In the manufacturing world, orders are often booked months in advance. When a factory or company receives fewer orders, it will stop hiring new workers and potentially lay off some existing workers as well. This is a good sign that other parts of the economy will also slow down. Other experts examine the government bond market to see how willing investors are to lend money to governments over a long period of time.

When investors fear that the economy is slowing, they often sell their shares in public companies and instead lend their money to governments by purchasing bonds. This is because bonds are typically considered a less risky investment. So those are the warning signs of a recession. But

what

really causes them? A healthy economy has a lot of money flowing through it. Business owners are investing money in their businesses and hiring more people. Consumers are spending money on your products and services. But if businesses and consumers stop spending that money, less money will flow through the economy and growth will begin to slow.

Some factors can block that flow of money. One of them is high interest rates. When rates are high, people get more money by putting their savings in a bank account, but they also end up having to shell out more to get a loan. This can encourage people and businesses to save more and borrow less, causing their spending to drop. Consumer confidence is a way to measure people's psychological approach to money. Economists follow this closely. Low levels of consumer confidence mean people are worried about the economy, and that may cause them to once again hold onto their money, rather than invest or spend it.

A stock market crash, for example, is one of the surest ways to shake consumer confidence across the board. But inflation may be the most important factor. It causes the prices of goods and services to increase. If your salary doesn't keep pace, that means you'll have to cut back and buy less things. When this happens, people and businesses once again tend to reduce spending and save more. And an economic crisis that begins in one country can spread beyond its borders, creating a domino effect. Let's explore an example: the 1997 financial crisis in East and Southeast Asia. It began in Thailand when the value of the country's currency, the Thai baht, plummeted.

Investors had lost confidence in the country and that lack of confidence contaminated the rest of the region. Travelers face strict limits on the amount of currency they can take out of the country. Other Asian currencies such as the Malaysian ringgit and the Indonesian rupiah also began to lose value. Soon, investors around the world became reluctant to lend money to any developing country. More recently, the trade war between the United States and China has also affected many other parts of the world. These two economic superpowers produce and sell about 40% of all world output, and economists fear that the knock-on effects of their continued conflict could create the next great international recession.

Take Germany as an example. Its economy is largely based on exports. Earn money by building machinery and equipment and shipping it abroad to other countries like China. But if China foresees lower demand for its products from the United States due to the trade war, it will order less machinery from Germany to manufacture them. Germany is the largest economy in the eurozone, which means that if it enters a recession, the rest of Europe will likely suffer as well. Some experts say the 2008 financial crisis marked the beginning of a new era of deglobalization. That means that nation-states are less focused on international trade and more on their domestic economic agendas.

They say all this could lead to more frequent recessions. And that's why these experts believe we should reconsider

what

constitutes economic success in developed countries. The total debt burden will increase. Populations will fall, as will the productivity of our workers. Therefore, they say, it is not realistic to think that growth rates can continue to increase as they did in the second half of the 20th century. They suggest that an alternative approach is to focus on economic satisfaction and contentment, with a number such as per capita income growth. Basically, this measures how much money the average person makes.

While there are warning signs of another global recession, geopolitical tensions and deglobalization make it even more difficult to predict the future. But one thing is certain: we live in a new era of uncertainty.