It has become commonly accepted that a recession occurs in times of continuous negative real GDP growth. However, there are a variety of criteria that should be observed along with the GDP. Recessions are usually accompanied by higher unemployment rates: In the United States (U.S.), for instance, the unemployment rate almost doubled between 2008 and 2010 as the global financial crisis hit the economy. The pandemic brought another rise in the unemployment rates in most developed countries, despite employment figures starting to stabilize towards the end of 2020. Another commonly used indicator is the decline in industrial production, which could be seen globally between June 2021 and May 2022. Lastly, trends on the financial markets provide a more trackable indicator of a recession.
Alarming signals on the financial markets
Recession warning lights often appear in the financial markets first, as they reflect investors’ confidence in the development of the economy. One of the most reliable indicators of an impending recession is the inverted U.S. Treasury yield curve, which means that bonds of longer maturities provide a lower yield than bonds with short maturities. This indicates a high level of uncertainty and mistrust around the condition of financial markets in the future. Recent trends in major stock indices also paint an alarming picture: The Dow Jones Industrial Average index has been struggling since the beginning of 2022, and so has the S&P 500 index. The stock market dips in early 2022 are certainly an indicator that investors are unsure about the health of the economy, and, combined with the other indicators suggest that a major recession is on the horizon.