During a recession, growth of the economy slows down significantly. It is usually defined as two consecutive quarters of negative gross domestic product (or GDP) growth. It can be difficult to identify when an economy enters a recession because growth indicators are generally negative in a recession while positive in a slowdown.
In some cases, the onset of a recession can be predicted with reasonable accuracy by looking at economic trends over time such as falling asset prices (e.g. equities, housing) and a decline in lending by financial institutions. However, it is still impossible to predict many recessions in advance.
There are several main causes of recession:
A sharp drop in activity can occur when the financial system suffers a crisis that makes it hard for consumers and businesses to borrow. This chokes off spending and investment, which slows growth. An increase in interest rates can also slow an economy by raising the cost of borrowing which reduces demand. Falling asset prices can lead to a negative wealth effect that reduces consumer spending and may cause companies to delay investments. Inflation outstripping nominal wage increases can also make it harder for people to afford goods and services and therefore leads them to spend less. Unexpected events like natural disasters, wars or pandemics can also disrupt supply chains and reduce the demand for goods and services leading to a downturn. This is known as a black swan event. The 2020 COVID-19 flu pandemic is a good example of this.