What causes a recession? It’s not entirely clear – each recession is unique, with its own combination of causes. But looking back, we can see some common triggers of economic downturn. All are in some way linked to lower spending: something happens that makes people hang on to their cash instead of splashing out.

One such trigger is inflation. If an economy starts growing too fast, it can overheat: everyone who can be employed is employed, and the economy is producing as much as it can. Demand for goods and services outstrips supply, which sends prices up. Meanwhile, all the money that’s not being spent on goods and services can’t be invested into growth, because there’s no one left to employ.

As prices rise, people become inclined to spend less (and save instead) as things cost more. But when everyone does that, the economy begins to suffer. Businesses struggling with increased costs might need to lay off employees to stay profitable. Those newly unemployed folks have to reduce their spending even more, further slowing the economy. It’s a vicious cycle – and it can reach a point where the economy begins to contract.

Inflation can happen for reasons other than fast growth: a big rise in oil prices, perhaps triggered by war or trade disputes, can also drive prices up.

Raising interest rates is one way to tackle inflation – but high interest rates can also bring about a recession. Higher rates make borrowing money more expensive and saving money more advantageous, which discourages investment. Fewer businesses will start up in these conditions and existing ones will be less willing to expand – that reduction in spending can trigger a recession. ⏬

When interest rates are high or if there’s a credit crunch – a situation where lenders become reluctant to lend – liquidity can dry up. Banks might collapse or be bailed out, and those that remain might charge more to borrow. If lending to businesses and individuals plummets, the cycle continues…

Big market shocks are key: the last two US recessions were triggered by an overpriced bubble bursting. In 2001, it was the dot-com bubble. In 2007, it was real estate. In each case, the sudden crash in asset prices scared consumers, causing them to reduce spending – which brought on a recession.