What is a recession?
A recession means that the economy is temporarily experiencing negative growth. Literally, recession is defined as a ‘decline’ or ‘fallback’. A recession is declared when the gross domestic product (GDP) – in other words, the total monetary value of all produced goods and services – shrinks for two consecutive quarters.
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Recession vs. depression
The terms recession and depression seem similar, but they are not the same. The difference lies in the duration. We speak of a recession if it lasts for two consecutive quarters. A depression lasts much longer. It is a prolonged, deep crisis involving declining growth in economic activities. The Great Depression of the 1930s, resulting from the Stock Market Crash in 1929, is the most famous example of this.
The history of recessions
Throughout the years, there have been various recessions. Such as the first oil crisis between 1973 and 1975, caused by an oil boycott by OPEC countries against, among others, the United States and the Netherlands. A few years later, the second oil crisis occurred in 1979 due to unrest in the Middle East. Oil prices rose sharply, causing many Western economies to fall into recession in 1980 and 1981.
Recessions have also occurred after the turn of the century, with the Credit Crisis between 2007 and 2009 making a significant impact. This financial crisis arose from the collapse of the housing and mortgage market in the United States due to so-called ‘subprime mortgages’. The situation deteriorated rapidly, including in the Netherlands. As a result, the government had to intervene and take various measures to prevent worse outcomes.
When was the last recession in the Netherlands?
The most recent recession in the Netherlands was in 2020. During the coronavirus crisis, the country was hit by economic contraction. Lockdowns and travel restrictions led to an abrupt halt of the economy. Governments and central banks reacted quickly with support measures to protect companies and jobs. In 2023, the Netherlands experienced a short, mild recession, mainly due to lower exports and decreased purchasing power resulting from high inflation and rising interest rates.
What causes an economic recession?
A recession is never caused by a single factor. Usually, it is a mix of circumstances that together cause a domino effect. Below you can read about the most important causes.
- Housing market: The housing market played a major role in the crisis of 2007-2009. It was relatively easy to take out a mortgage, but at a certain point, people could no longer pay off that mortgage. Many banks got into trouble because of this.
- Stock market crash: If stocks drop out of nowhere, investors lose confidence. But the value of the company also drops. If this applies to many companies, they get into trouble.
- Inflation: High inflation makes everything more expensive – from your groceries to your energy bill. When central banks raise interest rates to slow that down, borrowing becomes more expensive. That can lead to fewer investments and less spending.
- Consumer confidence: If people think things are going badly and a recession is looming, consumers spend less. This ensures fewer investments. This creates negative economic growth.
- Acute crisis: Unexpected events, such as wars, pandemics, or sudden energy crises, can abruptly disrupt economic activities. We saw that in 2020, when the world temporarily locked down due to the coronavirus crisis.
Economic cycle
Besides the five points above, the natural economic cycle can also play a role in a recession. The economic cycle is the wave movement between economic growth and decline. When the economy is growing and running at full speed, we speak of an economic boom. If there is an economic decline, you end up in a downturn or a recession. This cycle is important for a healthy economic balance.
What happens during a recession?
During a recession, consumers spend less money, which means companies have to take measures to save on costs. Think of less production, laying off staff, or borrowing money. Ultimately, a recession can cause companies to go bankrupt, high unemployment, and people being unable to pay their (mortgage) debts.
During a recession, listed companies also suffer from falling valuations and stock prices. This can cause the general stock market to drop as well.
How long does a recession last?
On average, a recession in developed economies lasts between six and eighteen months, but this can vary per country and situation. But it can also happen that a recession lasts longer. If a recession is very deep or prolonged, economists are more likely to speak of a depression or economic crisis. Just think of the Great Depression in the 1930s which lasted more than ten years.
What to do with your money during a recession?
A recession feels uncertain. It influences the value of your investments. The most important thing you can do? Stay calm and stick to your plan. In addition, it is wise to stay well-informed about what the (global) economy is doing, for example via the news and BUX.
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All views, opinions, and analyses in this article should not be read as personal investment advice. Individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
