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What is a recession?

·Finance and news reporter
·2-min read

It’s official: The UK is now in a recession — like pretty much every country that entered a coronavirus lockdown.

But what, exactly, are recessions? To understand them, first we need to take a step back and talk about economic output.

The most common measure of economic output across the world is GDP, or gross domestic product.

GDP is the total monetary value of all the finished goods and services produced within a country during a given time period.

That includes cars and other goods produced in factories, homes built by the construction sector, retail sales, services produced by financial firms — and a whole lot more.

READ MORE: UK economy officially enters recession after record 20.4% contraction

In the UK, the Office for National Statistics produces estimates of the country’s GDP on an annual, quarterly, and monthly basis.

When it comes to GDP, you're probably used to hearing about percentages — and these percentages represent the extent to which GDP has either grown or shrunk in the given time period.

Economists tend to focus on quarterly GDP data — since monthly data can fluctuate a bit too much, and three months is a good chunk of time to examine changes in an economy.

So, when you hear that GDP declined by 20.4% in the second quarter, that means that the monetary value of all the finished goods and services produced in the UK between the start of April and the end of June fell by that much compared to the first quarter, which ended in March.

READ MORE: What is a V-shaped economic recovery?

GDP had already fallen by 2.2% in the first quarter compared to the fourth quarter of 2019.

And that's the key point: Long-standing convention in the UK means that a recession is defined as two back-to-back quarters of declining GDP.

The UK thus officially entered a recession — the first for the UK economy since 2009, when the downturn caused by the financial crisis ended — at the end of the second quarter of 2020.

This recession will end when we have a quarter when GDP grows again.

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