A recession can be defined as a gross decline in overall employment, income, output, and sales. This downward trend spreads throughout the economy, from industry to industry, and even nation to nation.
A recession tends to last more than a few months. As a rule, it tends to be readily apparent in GDP and industrial production. It diminishes economic values steadily over time.
The persistence and severity of a recession is what determines how low the economic trough declines. Moreover, the characteristics that accompany a recession can vary greatly depending on how it began, along with the nature of the underlying fundamentals that drive the trend further downwards.
An excellent example of an economic contraction that resulted in a global recession, was the financial crisis of 2007-2008.
Marked by a clear overvaluation (often known as a “bubble”) in the real-estate markets of the United States of America, this bull-market crash was the result of exacerbated and excessive risk-taking by large financial institutions.
With the valuation of underlying securities tied to the real-estate market plummeting in record fashion, a recession ensued. The ensuing panic in the financial markets culminated in an international banking crisis.
In short, banks had effectively overleveraged themselves in a deregulated, potentially volatile, and highly overvalued market.
The ensuing dip in real-estate and financial valuations came to be known as the Great Recession. Up until this point, it was the most severe global recession since the Great Depression.
It effectively resulted in the loss of over $2 trillion U.S – a massive sum which was claimed by the decline in the span of mere months.