A recession is the part of an economic cycle that involves an economic contraction.
Much about recessions is shrouded in mystery. But there are a few things we know. According to one popular definition, a recession is two consecutive quarters of economic contraction. And, in general, recessions are caused by imbalances in the market, triggered by external or internal factors. But to repurpose Tolstoy’s famous quip about unhappy families, each recession is unhappy in its own way—as we’ll see in three case studies highlighted below.
Recessions often cause (or follow) big declines in asset prices. It’s human nature to follow the pack, and it takes nerves of steel to stay in the game when everyone else is getting out. In business, a steady hand—and meticulous preparation—can help steer the ship through the storm intact.
Read on to learn more about recessions and concrete steps companies can take to minimize the impact. Learn more about McKinsey’s Strategy & Corporate Finance Practice.
Are we in a recession now?
Economic signals are mixed, and uncertainty remains high. But as of May 2024, no. Very few of the world’s major economies are in a recession. A new era appears to be on the horizon, heralded by new geopolitical disruptions, ongoing shifts in the global economic order, and the advance of AI. A wide range of medium- and long-term economic scenarios remain in play.
Those include optimistic scenarios. There are many indicators that the future will be both prosperous and sustainable. Business leaders who invest in the future while being mindful of ongoing uncertainty will be best situated to come out ahead. These investments can include upskilling workers and changing how their organizations operate, striving to offset higher input prices and interest rates, and carefully targeting capital and technology investments.
Are recessions inevitable?
Yes, according to modern economic thought. Prior to the late 19th century, most economists believed recessions were caused by external factors, such as wars and extreme weather events. Neoclassical economic thinkers developed the idea of business cycles: alternating peaks and troughs of economic expansion and contraction. Recessions, they argued, start at the peak of the cycle and end at the bottom of the trough, which is when the next period of expansion begins. Today, we know that recessions are caused by imbalances in the market. While we can’t know when the next recession will come, or how much value will be shed, it’s pretty much guaranteed that another recession will come around sooner or later.
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