As the title says – what exactly causes recession? Especially in today’s times. I understand that Covid caused countries to spend more money, but on the other hand there was lots of remote work going on and big companies seemed to be doing quite fine (at least as far as I am aware). I am currently living in UK and I am specifically interested what causes recession in UK.
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People losing their jobs means the real economy (stuff) shrinks. That’s the recession, people not working. This happens after the money-economy shrinks. Aka people lose their jobs because something happens financially where people stop getting paid (debts go bad, so someone can’t pay someone, so that someone else can’t pay someone, and so on).
It’s typically a decline in economic activity. That can be caused by a lasting massive drop in employment/income/expenditures/retail sales/production like during covid or a massive drop in values like in housing or dotcom bubbles. The fed spending more money isn’t necessarily a cause however, because money could be spent on wartime productivity or safety nets like rent moratoriums and soften a slump.
There is no single unique cause to a recession. For example, the recession associated with the financial crisis of 2007-09 was caused by a collapse in the housing bubble and the subsequent impairment of the financial sector which then spread to the real sector.
The current recession is less about covid and more about the war in ukraine and inflation. For one, the war in the ukraine and the economic sanctions against russia after the invasion and associated rise in energy prices. An additional factor is the rise in inflation which forces central banks to react to it by raising interest rates which causes economic activity to decline.
Remember that the economy typically grows by somewhere between 2% and 5% a year, so a 5% drop in productivity would give us no growth which is a pretty severe ~~depression~~ *recession*.
For various parts of the pandemic a lot more than 5% of the workforce was on furlough so (theoretically) had zero productivity, and many others were working considerably less productively from home. It’s hard to be fully productive when your collaborators are on furlough, or you can’t get parts shipped from overseas, or you are ill.
The government spread that loss of output across the population and over time by borrowing money to pay for furlough, but the loss of output is still there and we will see it as a recession over several years.
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