Booms and recessions

What are booms and recessions?

A boom is a time when the economy is growing fast: factories have plenty of orders, new jobs appear, shops sell well and people spend. A recession is the opposite: output and sales fall, businesses stop hiring and some people lose their jobs. Because the economy keeps moving between the two, this is called the business cycle.

A well-known definition of recession comes from the US National Bureau of Economic Research (NBER): “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The news often uses a simpler rule: two quarters in a row of falling GDP means a recession. That is a rule of thumb, not an official definition.

Why it matters to an investor

• To understand income risk: in a downturn both jobs and business income come under pressure. That is exactly when you may need cash, which is why an emergency fund matters.
• To understand why asset prices swing: company profits rise and fall with the cycle, so share prices usually fall before or during a recession.
• To read the direction of interest rates: in a downturn the central bank usually cuts its policy rate, and raises it when the economy overheats. That changes FDR and bond returns too.
• To avoid panic and euphoria: knowing that cycles turn makes it easier to resist thinking “this will last forever” in a boom and “it will never recover” in a slump.

The phases of the cycle

• Expansion: output, income and jobs grow. When it is fast and strong, it is called a boom.
• Peak: growth reaches its high point. Inflation often picks up around here, and the central bank may raise rates.
• Contraction: activity falls. If it is deep and lasting, it is a recession; if very deep and long, a depression.
• Trough: the fall stops and a recovery slowly begins. How long each phase lasts cannot be known in advance.

Why booms and recessions happen

To soften a downturn, the central bank usually cuts interest rates and adds money to the banking system; the government may also try to support demand through spending or taxes. Economists disagree about how much to do and when.

• Demand shocks: when people or businesses suddenly cut spending, or demand falls abroad, exports and remittances feel it.
• Supply shocks: a sudden jump in fuel prices, floods or a pandemic disrupt production.
• Credit waves: in a boom loans are easy to get and prices climb further. Later, when repayments bite, spending and investment fall together.
• Mood: optimism and fear are both contagious. When everyone expects good times they spend more; when they are afraid they all hold back at once.

In numbers, globally and in Bangladesh

According to the World Bank, world GDP has clearly shrunk twice in recent decades: by about 1.3% in 2009 and by about 2.9% in 2020, the COVID year. The US “Great Recession” ran from December 2007 to June 2009; real GDP there fell about 4.3% and unemployment reached 10% in October 2009.

In a fast-growing economy like Bangladesh, the cycle usually shows up as a slowdown in growth rather than outright shrinking. In World Bank data, Bangladesh’s GDP has not fallen in any year since 1976. Growth was roughly 6% to 8% in most years from 2010 to 2019; it dropped to about 3.4% in 2020, returned to about 7% in 2021–22, and was about 4.2% and 3.5% in 2024 and 2025. These figures can be revised later.

Common mistakes

• Assuming in a boom that the pace will last forever, and borrowing more than you can handle on that hope.
• Thinking you can tell exactly when a recession will start or end. Professional economists cannot do this reliably either.
• Selling everything near the bottom out of fear, and then missing the recovery.
• Treating a stock market fall and an economic recession as the same thing. They are related, but they do not always happen together.

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