Technical recession

Topic: Economic Growth Theories and Business Cycles · NCERT: Beyond NCERT

Meaning

A technical recession is when an economy's real GDP (GDP adjusted for inflation) falls for two quarters in a row. It is a rule of thumb, not an official test [3].

It matters because it is the quickest and most widely used signal that an economy has moved from slowing down to actually shrinking. In the RBI Bulletin of November 2020, India was said to have entered a technical recession for the first time in its history [1].

• Rule: Real GDP growth < 0 in quarter 1 and real GDP growth < 0 in quarter 2 → technical recession.

Explanation

How the rule works

• A quarter is a three-month period. The Indian financial year has four quarters: Q1 (April-June), Q2 (July-September), Q3 and Q4.
• Real GDP removes the effect of price rise, so the test measures only whether the economy is producing less.
• The test: if real GDP growth is negative in two quarters that come one after the other, the economy is in a technical recession.
• Most commentators use this as a practical definition of recession [3].

• One negative quarter is not enough. Two negative quarters that are not back-to-back are also not enough.

• Where it sits in the business cycle: it marks the contraction phase (activity falls), heading towards the trough (the lowest point).

Why it is called "technical"

• It is only a mechanical test on one number, which is GDP.
• Economists call the rule narrow, because it ignores jobs, incomes and sales [3].
• What the NBER does instead:
• The National Bureau of Economic Research (NBER) is a private US research body. Its Business Cycle Dating Committee dates US recessions [3].
• It defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months" [3].
• It checks production, employment, income and sales [3], and judges depth, spread and duration.

• Two negative quarters are not required for the NBER to call a recession [3].

• So the two tests can disagree:

• A short, one-time shock can meet the two-quarter rule even when the economy bounces back quickly.
• A broad downturn, with jobs and incomes falling for months, can be a recession under the NBER test even without two negative GDP quarters in a row.

Worked example: India, Q1 2020-21

• Real GDP at 2011-12 prices:
• Q1 2019-20: ₹35.35 lakh crore

• Q1 2020-21: ₹26.90 lakh crore [2]

• Growth = (26.90 − 35.35) ÷ 35.35 × 100 = −8.45 ÷ 35.35 × 100 ≈ −23.9% [2]

• Q2 2020-21: the NSO's first estimate was about −7.5%. The RBI's nowcast was (−) 8.6% [1].
• Result: two negative quarters in a row → technical recession in the first half (H1) of 2020-21 [1].
• Note: in India, each quarter is compared with the same quarter of the previous year, as the Q1 example shows.

How it compares with a typical recession

• A typical recession lasts about one year and cuts output by about 2% of GDP. A severe one cuts it by close to 5% [3].
• Investment and industrial production fall much more than GDP as a whole [3]. This is why IIP (Index of Industrial Production) swings harder than GDP.

In India

• Who measures it:
• The NSO (National Statistical Office) under MoSPI releases quarterly GDP estimates [2].

• The RBI builds an Economic Activity Index from high-frequency indicators (data released every week or month). This lets it estimate GDP before official data comes out. This is called nowcasting [1].

• India's first technical recession (2020-21):

• Q1 (April-June 2020): real GDP fell 23.9% (NSO first estimate) [2]. The cause was the national COVID-19 lockdown.
• Q2 (July-September 2020): the RBI nowcast put it at (−) 8.6% [1]. The NSO's first estimate was about −7.5%.

• RBI Bulletin, November 2020 (released 11 November 2020): "India is likely to have entered a technical recession in the first half of 2020-21 for the first time in its history" [1].

• Why it was the "first time": India's earlier contractions, such as 1979-80, were measured yearly, not quarter by quarter. So the two-quarter test had never been met before.

• What happened next: the recovery was quick and V-shaped, meaning the economy fell sharply and then bounced back just as sharply.
• Contrast with 2019-20: growth fell to 3.9%. This was a slowdown, not a recession, because growth stayed positive.

Don't confuse with

• Economic slowdown: growth falls but stays positive (India 2019-20: 3.9%). In a technical recession, growth is negative for two quarters.
• Recession (NBER sense): a broad decline across output, jobs, income and sales, judged on depth, spread and duration. It does not need two negative quarters [3]. A technical recession looks only at GDP.
• Growth recession: GDP still grows, but so slowly that unemployment rises. Output does not shrink at all.
• Depression: a far deeper fall. GDP drops by more than 10% [3]. In the Great Depression, US GDP fell about 30% over four years [3]. A technical recession says nothing about depth.

Prelims Hooks

• Technical recession = two consecutive quarters of negative real GDP growth. It is a rule of thumb, not a legal or official definition [3].
• NBER does not require two negative quarters. It looks at depth, spread and duration across production, employment, income and sales [3]. This is a common trap.
• The RBI Bulletin of November 2020 said India was in a technical recession in H1 2020-21, for the first time in its history [1].
• Q1 2020-21 real GDP fell 23.9%, from ₹35.35 lakh crore to ₹26.90 lakh crore at 2011-12 prices (NSO) [2]. The RBI nowcast for Q2 was (−) 8.6% [1].
• Slowdown vs recession: growth dropping from 6.5% to 3.9% is a slowdown, not a recession. Output must actually fall.
• Order of severity: Slowdown → Growth recession → Recession / Technical recession → Depression (GDP fall >10%) [3].

Mains Points

• The limits of the two-quarter rule (GS-III):
• The rule is simple and quick, but it can mislead. India's 2020 technical recession came from a lockdown, and a fast V-shaped rebound followed [1][2].

• NBER-style tests also look at jobs and incomes, and at how deep, wide and long the fall is [3]. They are a better guide to how big a stimulus should be and how long it should last.

• Nowcasting and timely policy:

• Official GDP data comes out with a delay. RBI nowcasts, such as the Economic Activity Index of November 2020 [1], and leading indicators like PMI and credit growth help the RBI and the Finance Ministry act before a downturn deepens.

• Unemployment is a lagging indicator. Jobs recover after output does, so support for workers may need to continue even after GDP turns positive.

• Cycle vs trend:

• The 2020-21 technical recession was a shock to the business cycle. The 2019-20 slowdown (3.9%) came before COVID and points to deeper, structural weakness, such as weak investment and stress on bank balance sheets.
• Demand stimulus can end a technical recession. It cannot fix a trend problem, which also needs supply-side reforms that raise potential growth (the fastest rate the economy can grow without pushing up inflation).

Related concepts

• Business cycle
• Expansion
• Overheating
• Goldilocks economy
• Peak
• Trough
• Recovery
• Soft landing
• Economic slowdown
• Growth recession

Read more

• Business cycles: phases and the vocabulary of downturns