What is a recession? Definitions, causes and what happens to jobs

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"Recession" is one of the most feared words in economics, but it is used loosely. Here is what it actually means, why recessions happen, how they affect ordinary people and what governments and central banks do about them. This guide is educational and not investment advice.

The common definition: two quarters of falling GDP

The definition you will hear most often is two consecutive quarters of negative economic growth, meaning real GDP shrinks for six months in a row. This is often called a "technical recession". It is a convenient rule of thumb, simple and quick to check. But it is not an official definition everywhere, and it has weaknesses. Two tiny dips of a tenth of a percent can meet the rule without anyone noticing a slump, while a sharp, widespread collapse that recovers within one quarter might not meet it at all. The UK's Office for National Statistics, for instance, says it has no official definition of recession and treats two quarters of falling output as a convention, while noting that it ignores the scale and context of the falls.

The US approach: the NBER

In the United States, recessions are dated by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), a private, non-profit research organisation. It describes a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. The committee looks at three things, sometimes called the three Ds: depth, diffusion (how widespread the decline is) and duration. It examines a range of indicators, including employment and real income as well as GDP, and it does not use the two-quarters rule. Most US recessions do include two quarters of falling GDP, but not all. The very short downturn at the start of the Covid-19 pandemic in 2020 was classified as a recession because the fall was so deep and so widespread. The NBER usually announces the start of a recession well after it has begun, because it waits for enough data.

What causes recessions

There is no single cause, but common triggers include:

Financial crises: when banks get into trouble, lending dries up and businesses and households cut back.
Bursting bubbles: a sharp fall in house or share prices can make people feel poorer and spend less.
Shocks to supply: a sudden jump in energy prices or a disruption to production raises costs across the economy.
Tight monetary policy: when central banks raise interest rates to fight inflation, they can slow the economy more than intended.
Collapses in demand: a loss of confidence can become self-fulfilling, as consumers and firms all cut spending at once.
Pandemics and other major events that halt normal activity.

What happens to jobs and households

In a recession, businesses sell less, so they cut costs. Typically:

Hiring slows first, then layoffs rise and unemployment goes up.
Hours and overtime are cut, and pay rises become smaller or are frozen.
Young people and new graduates often find it harder to get a first job.
Some businesses close, especially smaller firms with little cash.
Unemployment often keeps rising for a while after output has started to recover.

Not everyone is hit equally. Industries such as construction, manufacturing, hospitality and retail tend to be more exposed than sectors such as healthcare.

How governments and central banks respond

Monetary policy: central banks usually cut interest rates to make borrowing cheaper. When rates are already very low, some have bought large amounts of bonds to push long-term rates down, known as quantitative easing.
Fiscal policy: governments can increase spending, cut taxes or send support directly to households and businesses.
Automatic stabilisers: some support kicks in without any new decision. Unemployment benefits rise and tax receipts fall as incomes drop, which cushions spending.
Financial support: in a banking crisis, authorities may guarantee deposits or support lenders to keep credit flowing.

These responses involve trade-offs, such as higher public debt or the risk of inflation later, and economists often disagree about the right mix.

Practical preparation

General steps people often consider are building an emergency fund, keeping debts manageable and keeping skills up to date. Your own circumstances matter, so for decisions about your money, speak to a qualified, independent adviser. Have you lived through a recession, or have questions about how one would affect your job or field? Share in the comments below.