When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people." High levels of indebtedness or the bursting of a real estate or financial asset price bubble can cause what is called a "balance sheet recession." This is when large numbers of consumers or corporations pay down debt (i.e., save) rather than spend or invest, which slows the economy.The term balance sheet derives from an accounting identity that holds that assets must always equal the sum of liabilities plus equity.For example, economist Richard Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession." It was triggered by a collapse in land and stock prices, which caused Japanese firms to have negative equity, meaning their assets were worth less than their liabilities. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities.Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise.In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.Korea, Hong Kong and South-east Asia experienced U-shaped recessions in 1997–98, although Thailand’s eight consecutive quarters of decline should be termed L-shaped.Recessions have psychological and confidence aspects. For example, if companies expect economic activity to slow, they may reduce employment levels and save money rather than invest.
By November 1963 forecasts of GDP started to be published in the Review.
I argue that the forecast process is inherently subject to large errors, and so is a hazardous exercise, but that does not by itself invalidate the exercise because both the producers and consumers of forecasts understand that errors will occur.
And this knowledge throws up a clear obligation for producers to explain errors before the fact by use of uncertainty or scenario plots and for consumers to treat the forecasts with caution." Extract from , commentary by Prof. Chadha, National Institute Economic Review, February 2017, no239 The Institute has been developing its analysis of economic prospects and the causes of change since its establishment in 1938.
A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different. In the US, V-shaped, or short-and-sharp contractions followed by rapid and sustained recovery, occurred in 19–91; U-shaped (prolonged slump) in 1974–75, and W-shaped, or double-dip recessions in 19–82.
Japan’s 1993–94 recession was U-shaped and its 8-out-of-9 quarters of contraction in 1997–99 can be described as L-shaped.