What the heck is a double dip recession?

For the last several months, the phrase “double dip recession” has been doing the rounds. The expression continues to roll off the unctuous tongues of analysts and economists. It appears in articles authored by Nobel laureates on where the US and/or European economies are headed. But what is a double dip recession?

I had a vague idea that it had to do with two back-to-back recessions. But I wasn’t entirely sure. So I decided to educate myself. And having read up a little on the subject, I thought I’d do my bit to illuminate others.

A double dip recession is when there is negative growth in GDP (of a country) after a quarter or two of positive growth. Typically, the terms refers to two recessions separate by a relatively short recovery. Central banks in emerging markets are walking a tightrope between the need to keep inflation at a reasonable level (say 5%) and the growth imperative. In developed economies, interest rates are already near-zero- so capital is moving to economies where they earn a positive return. From a GDP growth perspective, the developed economies are almost stagnant (some are showing negative growth) so jobs are being lost while new ones are not being created. This leaves little wiggle room for taking hard political decisions such as cutting subsidies (and hence, deficits). And when countries like France and Germany themselves start feeling the pinch, their willingness and ability to support a Portugal or a Greece will reduce. The consequent unemployment unleashes a powerful socio-economic backlash that will also have political ramifications.

Economists are still not sure if even the US and Europe are going to end up in a double dip recession. But that is just a matter of semantics. Irrespective of the nomenclature, it is clear that the global economy is too interconnected for anyone to accurately predict how it will pan out. There are simply too many moving parts.