Understand what a recession is and how it differs from economic depression

JAKARTA, KOMPAS.com – The number of countries on the brink of economic recession is increasing. Recently, Finance Minister Sri Mulyani Indrawati also predicted that Indonesia would enter the 2020 economic recession.

So what is a recession and what is the difference between a recession and an economic depression (the difference between a recession and an economic depression)?

Technically, an economic recession is when the economy grows in two consecutive quarters of negative growth on an annual basis.

Meanwhile, quoted from The balance, Friday (9/22/2020), a recession is a significant drop in economic activity that lasts for several months, usually more than three months.

A number of indicators that a country in recession can use include a decline in GDP, a decline in real income, the number of jobs, retail sales, and a decline in manufacturing.

Also Read: Sri Mulyani’s Third Quarter Economic Projection of Minus 2.9 Percent, Prepare for a Recession

When it means a recession, economic growth can hit 0 percent, even less in the worst of conditions. Economic growth has been the main indicator to measure the development and progress of a country. High economic growth is represented by an increase in GDP.

Many factors influence economic growth. Some of these variables come in the form of external factors that are out of control, such as global economic turmoil and market mechanisms.

Some say the country has experienced a recession when GDP growth has been negative for two or more consecutive quarters. However, a recession could occur before the quarterly GDP report is released.

But cite evidence National Bureau of Economic Research (NBER), In general, what is a recession occurs when a country enters a period of downturn in economic activity, extends to all sectors of the economy, and takes more than a few months, generally more than 3 months.

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The economic impact during a recession is very pronounced and the effect is domino on economic activity. For example, when investment plummets during a recession, it automatically eliminates a number of jobs, resulting in a significant increase in layoffs.

The production of goods and services also decreased, reducing the national GDP. If not resolved immediately, the ripple effect of the recession will spread to various sectors, such as bad bank credit, hard-to-control inflation, or deflation.

So, the trade balance is negative and has a direct impact on foreign exchange reserves. On a real scale, many people lose their homes because they cannot pay the installments, which weakens their purchasing power. So many companies have to close.

It can be said that there is no standard definition of the difference between a recession and an economic depression. However, economic depression is generally described as a condition that is more severe like an economic recession and lasts for a long time or months.

Also read: Britain hit by a wave of layoffs, the most since the 2009 recession

Quoted from FortuneThe difference between a recession and an economic depression can be seen in the level of decline in GDP and the time period. Depression means a deterioration in economic conditions that is worse than a recession.

A recession means that it occurs when GDP falls in the range of minus 0.3 to 5.1 percent. Meanwhile, the depressed GDP decline stood at a level of minus 14.7 percent to 38.1 percent.

When viewed from the time period, the duration of the recession lasts for at least two consecutive quarters up to 18 months. While the economic depression can last more than 18 months.

In real terms in the countryside, depression can be seen when the unemployment rate rises due to long-term negative economic growth.

In terms of scale, economic recessions and depressions are also different. Recessions are often limited to one country. While depression is usually quite severe and can have a global impact (what is a recession).

Also read: Asia faces its first recession in 60 years

The United States experienced a period of economic depression in 1930 called the Great Depression. The Great Depression was one of the most serious economic recessions in history that lasted from 1929 to 1939.

The Great Depression began in the United States in 1929 as a recession before expanding globally, especially in Europe.

As with any long-term economic crisis, not only was there one event that led to the Great Depression, but there was a series of events that included the stock market crash of 1929 and the severe drought at the Dust Bowl in the 1930s.

The US economy itself had been on a downtrend during the summer before the collapse, with unemployment rising and manufacturing industry declining, ultimately overvaluing stocks.

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Then, on October 24, known as “Black Thursday,” investors sold nearly 13 million shares, signaling a weakening in confidence. Not only that, spending stopped, debt increased, houses were foreclosed, and banks began to fail.

The stock market crash of October 1929 sparked panic that resulted in a sharp drop in consumer spending and investment, led to a decline in manufacturing, and increased unemployment.

(Source: KOMPAS.com/Fika Nurul Ulya | Publisher: Sakina Rakhma Diah Setiawan)