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Daily News Analysis

Explained: What is a technical recession?

14th November, 2020 Economy

Context: Latest RBI bulletin projects contraction for a second consecutive quarter, which means the economy is in a ‘technical recession’.

  • While this pace of contraction is considerably slower than the 23.9% decline in the real gross domestic product (GDP) during the first quarter (April, May, June).
  • The contraction of Q2 is crucial because it implies India that has entered a “technical recession” in the first half of 2020-21— for the first time in its history.
  • To better understand the term “technical recession”, one must distinguish it from two other phrases — a recession and a recessionary phase of an economy.

What is a recessionary phase?

  • At its simplest, in any economy, a recessionary phase is the counterpart of an expansionary phase.
  • In other words, when the overall output of goods and services — typically measured by the GDP — increases from one quarter (or month) to another, the economy is said to be in an expansionary phase.
  • And when the GDP contracts from one quarter to another, the economy is said to be in a recessionary phase.
  • Together, these two phases create what is called a “business cycle” in any economy.
  • A full business cycle could last anywhere between one year and a decade.
  • The line graph accompanying this article maps India’s quarterly real GDP growth since 1951.
  • As one can see, this line goes up and down. The peaks and troughs show the different expansionary and recessonary phases of the economy.

How is a recession different?

  • When a recessionary phase sustains for long enough, it is called a recession.
  • In other words, when the GDP contracts for a long enough period, the economy is said to be in a recession.”
  • There is, however, no universally accepted definition of a recession — as in, for how long should the GDP contract before an economy is said to be in a recession.
  • But most economists agree with the definition that the National Bureau of Economic Research (NBER) in the United States uses.
  • “During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year”.
  • The NBER’s Business Cycle Dating Committee typically looks at various variables — employment, consumption etc — apart from GDP growth to arrive at a decision.
  • It also looks at the “depth, diffusion, and duration” of decline in economic activity to determine whether an economy is in a recession or not.
  • For example, in the case of the most recent dip in economic activity in the US, which started in February 2020 as a result of the Covid-19 pandemic, the drop in activity has been so great and so widely diffused throughout the economy that the downturn would have been classified as a recession even if it had proved to be quite brief.

Then, what is a technical recession?

  • While the basic idea behind the term “recession” — significant contraction in economic activity — is clear, from the perspective of empirical data analysis, there are too many unanswered queries.
  • Commentators often consider a recession to be in progress when real GDP has declined for at least two consecutive quarters.
  • That is how real quarterly GDP has come to be accepted as a measure of economic activity and a “benchmark” for ascertaining a “technical recession”.

Was India’s technical recession unexpected?

  • Given the nature of the problem — the pandemic — as soon as the lockdown was announced in March, most economists expected the Indian economy to go into recession.
  • In fact, most estimates expect the economy to contract for at least one more quarter — that is October to December, currently under way.

How long do recessions last?

  • Typically, recessions last for a few quarters.
  • If they continue for years, they are referred to as “depressions”.
  • But a depression is quite rare; the last one was during the 1930s in the US.
  • In the current scenario, the key determinant for any economy to come out of recession is to control the spread of Covid-19.
  • In India’s case, Finance Minister Nirmala Sitharaman has expressed hope that India’s recession could be already over and that the economy may register positive growth in the current quarter.