No one likes to talk about the dreaded “R” word — Recession. But recessions are actually part of the natural business cycle.

Every country’s economy fluctuates between periods of expansion and contraction in a cyclical pattern, even as it moves along a steady line of growth.

During an economic expansion, industrial production and employment increases alongside household and business incomes. And during a contraction, or recession, the opposite happens.

So, what causes a recession, and is it all bad?

This is Recession: Unpacked.

A recession is widely recognized as two consecutive quarters of negative GDP growth. But this isn’t the official definition.

The National Bureau of Economic Research declares recessions in the U.S. They define it as a significant decline in activity spread across the economy that lasts more than a few months.

Besides GDP, the NBER considers other key economic indicators including employment. Almost all recessions are associated with a meaningful rise in the unemployment rate.

There are several key factors that can cause a recession, and they often happen at the same time. These range from spiking energy prices, interest rate hikes, and macroeconomic imbalances like overheated housing markets or other asset bubbles.

Of course, singular events like a global pandemic can trigger a recession too. Recessions can be shallow and brief, or deep and drawn-out — or anything in between.

While most recessions last for more than a year, they can vary in length. Once a recession lasts longer than two years, it’s called a depression.

The Great Depression of the 1920s and 1930s went on for 120 months, making it the longest economic downturn in modern history. In contrast, the recent COVID-19 recession lasted around three months, making it the shortest on record. 

To determine the severity of a recession, experts use the three Ds:

Depth, or the extent of decline in broad measures of income, output, employment and sales.

Diffusion, or how widely the effects spread across regions, industries and economic activities.

And duration, or the interval between the peak and trough in the business cycle.

While recessions are usually widely diffused, not all economies experience a recession at the same time. However, trade and financial systems are becoming increasingly intertwined. So, the impacts of an economic downturn are felt from one country to another. This could give rise to a global recession. 

The pandemic lockdown and the 2008 financial crisis are examples of synchronized global recessions. There have also been “rolling recessions,” where downturns in the U.S. spilled over to the rest of the world.

To counter a recession, policymakers may increase money supply and reduce interest rates, which can spark an economic recovery.

Recessions are usually viewed negatively since they result in rising unemployment, lower wages and strained public finances. However, sometimes there is a silver lining.

For example, a recession can correct economic imbalances, such as runaway inflation. And by causing prices to fall, recessions can offer attractive buying opportunities for investors.

All in all, while recessions are disruptive events, they’re not entirely doom and gloom. Rather, they’re a normal part of the business cycle and can reset the economy for the better.