What is a recession and how long will it last?

The word “recession” has been popping up frequently in headlines lately, and it usually sounds alarming. In the aftermath of recent political and environmental events—the COVID-19 pandemic, Brexit, Russia’s invasion of Ukraine, and the European energy crisis, just to name a few—economies around the world are shrinking into recession. So, you might be wondering: What is a recession, exactly, and how bad will it be? 

First thing’s first: Don’t panic! It’s not as desperate as the headlines may seem. In this article, we’ll explain what a recession is, what happens during a recession, how long it lasts, and what you can do to weather the financial storm.

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Basically, a recession is a significant slowdown in economic activity—a contraction of the financial cycle. Technically speaking, countries have different measures for when an economic slowdown officially becomes a recession. In the European Union (EU), an official recession is when there's a decline in gross domestic product (GDP) for two consecutive quarters or more, along with declines in other variables such as employment and industrial production. 

If a recession is especially steep and long-lasting, it's called a depression. Again, this is subjective—there aren’t any numbers that automatically determine when a recession turns into a depression.

Although economic growth has been the norm since the Industrial Revolution, recessions can help to correct any economic imbalances. In turn, this can encourage long-term growth. Let’s take the energy crisis in Europe as an example. Economically, it’s pretty disastrous in the short term, but it does force countries to make changes to how and where they source energy—and these changes could be beneficial in the long run.

As we already mentioned, political and environmental events can trigger recessions. But other factors can contribute as well, such as financial crises, trade shocks, and supply chain disruptions. 

The most significant aspect of a recession is a general drop in spending by consumers and investors.

Since a recession is a period of economic slowness, that means that consumer demand, general spending, and employment will likely all drop. To promote economic recovery and continue to attract investment, banks will usually lower interest rates and governments may offer tax relief. Inflation, on the other hand, might rise.

A country's GDP sinks during a recession, so governments have smaller tax revenues. This might mean they need to decrease their budget, go into a deficit, or take out loans. Social benefits programs and spending tend to be higher, too.

Bankruptcy and a decline in industrial productivity are also common in the early stages of a recession. Markets may turn volatile, and investments like ETFs, stocks, and cryptocurrencies can be riskier.

A recession can last from a few months to a few years. However, it might take even longer for the economy to fully recover. 

In technical terms, economists measure the length of a recession from the previous economic peak to the lowest contraction point. Since it takes time for the economy to return to its former peak, consumers can feel the effects of a recession long after it's officially finished.

And although recessions might sound like a trend, they're actually not that frequent—at least in the Eurozone. According to the International Monetary Fund (IMF), recessions happened only 122 times between 1960 and 2007. Since its founding in 1999, the EU has gone through two recessions.

Europe was affected by the Great Recession of 2008-09, which started with the bursting of the US housing bubble and quickly spread worldwide. In the Eurozone, it lasted from the first quarter of 2008 to the second quarter of 2009.

Here, several EU member states, including Greece, Portugal, Ireland, Spain, and Cyprus, weren’t able to repay or refinance their debt after the Great Recession. This led to a subsequent recession that lasted from 2011 until 2013. 

The economy can be seen as a series of connected dominoes—if one goes down, others will go down with it. When there's a decline in growth, a recession spreads to many areas. If unchecked, the economic situation can quickly spiral and become self-perpetuating.

For example, the prospect of an economic slowdown might cause investors to pull back. This can then squeeze the growth of small businesses, which could result in layoffs. With the unemployment rate going up, consumer demand will decrease, resulting in more declining sales and possibly more layoffs, which causes consumer demand to shrink further—you get the picture.  

Although it sounds like recessions could keep spiraling forever, that's not the case. Why? Well, luckily there are countermeasures that can help to pull the economy out of a nose dive.

When a recession happens, governments adopt fiscal and monetary policies to ensure that the economic slowdown doesn't escalate indefinitely. These measures include raising social benefits like child support and unemployment insurance and lowering interest rates to make investing more attractive. 

Although recessions sound scary and can negatively affect consumers and investors, it's important to remember that they're part of the normal economic cycle. After a slow period, the economy will pick up again. 

In the meantime, a recession is a great time to look closely at where your money goes every month—and finally get your family budget in order. Maybe you can even start saving on groceries?

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If you want to get serious about saving, check out our beginner's savings guide. Then, explore our tips for how to stay on track by saving money each month. And with N26 Perks, get access to your favorite activities, services, and products—without blowing your budget. All N26 accounts include exciting offers from our partner brands, from travel to education to entertainment. You can get a great deal and still meet your savings goals—even during a recession.