What is an economic recession and how can it be dealt with?

What is a Recession?

A recession is a general drop in the economic activity of a country, which lasts several months and is reflected in wholesale and retail sales, and in industrial production, explains Gabriela Siller, director of economic-financial analysis at Banco Base.

Technically speaking, a recession occurs when there is a contraction in the Gross Domestic Product (GDP) for two consecutive quarters, details the financial community site Rankia.

However, “this is a ‘finger rule’ and not the official definition,” adds Siller.

There is currently a probability that Mexico’s main trading partner is headed for a recession.

According to the British economist John Maynard Keynes, a recession occurs when economic agents -families and companies- lose confidence in the system and, after a period of economic boom, stop investing and opt for capital accumulation and, therefore, liquidity, says the Rankia site.

At the moment there are not enough elements to confirm that Mexico is in recession; however, the Committee for the Dating of Cycles of the Mexican Economy assures that, if the decrease in economic activity and the fall in GDP prevail, Mexico could register a seventh period of recession in the last 40 years.

How long does a recession last?

It is difficult to establish how long a recession lasts. However, post-World War II recessions had an average duration of more than 10 months. The most recent, that is, the one that occurred in 2020, lasted two months, says Rankia.

US recession

If the scenario of a recession in the United States materializes, there would also be a decrease in national economic activity.

“In Mexico, 40% of GDP is exports, of which 94% are non-oil and 80% go to the United States. About 30% of Mexico’s GDP depends on US growth. In this way, if the United States falls into a recession, Mexico has no way of avoiding it”, anticipates Gabriela Siller, from Banco Base.

What can be done to avoid a recessive scenario, adds the specialist, is to generate an internal engine of growth, greater public spending on physical investment that generates a multiplier effect -resurfacing roads or building hospitals, among other works-, as well as giving greater certainty and promote a better environment for doing business.

Moody’s Analytics warned that the Mexican economy could register a 1.7% drop in GDP in 2023, in the event that the United States enters a recession, the financial advisory company Rocket anticipates in a statement.

Mexico has not recovered from the 8.5% drop in the economy in 2020, caused by the confinement that occurred to prevent coronavirus infections.

its impact

Due to the decrease in economic activity, demand falls, which causes companies to reduce their supply, which affects employment and people’s income, Siller points out. With unemployment comes the malaise of the impoverished population, he added.

If the recession continues, one of the main consequences is depression, that is, the economy is at its lowest point, stagnant, and with no improvement forecast, Rankia warns.

This note was originally published on August 19, 2022, so only economic data was updated.