Recessions are a normal part of the economic cycle, but they can be challenging. Understanding the causes, indicators and impacts can help you avoid unnecessary distress during downturns and position yourself for success in recovery.

Definition: In the most basic terms, recession is a prolonged decline in economic activity, measured by a country’s gross domestic product (GDP). GDP is the overall measure of a nation’s economy. However, economists have different theories on what constitutes a recession. Many focus on consumer spending and unemployment rates as key indicators. Others point to long-term trends that lay the groundwork for a recession in the years leading up to its onset, while still others focus on financial and psychological factors that lead to the downward spiral.

Financial factors, such as credit bubbles and bank crises, can trigger recessions. They often lead to a reduction in spending by consumers and businesses, which can cause companies to reduce production or shut down entirely, further worsening the situation. Unexpected events, such as geopolitical conflicts, natural disasters and pandemics, can also destabilize economies. They can affect production and demand for exports, leading to slower growth. They can also create supply-chain disruptions, driving up costs and reducing consumption.

Governments can stimulate the economy during a recession, but it takes time for their efforts to take effect. They can use fiscal and monetary policies to increase investment in infrastructure, lower interest rates and encourage job creation. They may also cut taxes or offer tax breaks to encourage business investment.