Recession is a word that, for reasons many can’t explain, strikes fear into their hearts. The word conjures up images of mass layoffs, tanking investments, and so on. But what even is a recession, and what causes them? Here are five factors that can contribute to one.

An unexpected shock to the economy.

When something unexpected happens – say for example, a global pandemic, or global supply chains get messed up because a tanker got lodged, or a country starts a war – these events can hugely impact economic conditions. All of a sudden, products aren’t reaching shelves, or oil isn’t reaching refineries because a country is refusing to send it. This puts a strain on supply… and when supply goes down and demands doesn’t go down with it… yup, you guessed it. Prices go up.

If this goes on for too long, it can cause a recession, as people spend less. And when you put all of those factors together at the same time? Well,

Excessive debt taken on.

When interest rates are low, it becomes really easy to borrow. Some people borrow to invest (holla), while others borrow to renovate their home, travel, and so on. Regardless of the use, the maximum debt people can manage financially is higher when rates are low than when they’re high. That means that, if people go to the max now, and then interest rates rise, they may not be able to handle their payments. This is one factor that contributes to a recession.

Too many investment bandwagon-jumpers.

It’s hard to sit back and watch other people make money while you’re on the sidelines. Reading about bitcoin going up by 7000% or whatever, and Gamestop, it’s hard sometimes. But here’s the thing: when an investment or market gets to the point that people are investing without a single clue as to what they’re buying or why, and just do it because everyone else is, that’s how bubbles form.

When professional house flippers buy a place, fix it up a bit, then put it on the market again 3 months later for 25% more than they paid, they’re betting that some schmo is going to come along and happily shell out for the place.

Eventually, that stops being the case. Maybe it’s because interest rates started to go up, and people can’t afford prices anymore. Maybe it’s one of the other factors on this list. But when that bubble does finally burst, the end result is often a recession.

Crazy-high inflation.

When inflation gets out of control, central backs try to put a lid on it by raising interest rates, exactly like they’re doing as I write this. The thing about that is that, in doing so, it puts a lot of pressure on people who took on way too much debt when it was cheap to do so. This leads to people not having money to spend elsewhere in the economy, which can contribute to a recession.

There’s been talk lately about what’s going to happen to all those people who need to renew their mortgage in 2026, when they’ll go from a 2% rate to over 4%. That may not sound like much, but it can literally add over a thousand bucks to a monthly mortgage payment. If this is the case for many families, they may be forced to downsize; if everyone does this around the same time, it could be very damaging to the economy, contributing to a recession.

Major technological advances.

When the industrial revolution happened, lots of workers lost their jobs, as they were replaced with machines that could perform repetitive tasks way more efficiently. More recently, there’s worry about the role of checkout-free grocery stores having the same effect on the retail industry.

When lots of people lose their jobs all at the same time, it has a knock-on effect on the overall economy. Those individuals and their families spend less, which means lower revenues for many business, which in turn spend less and may lay off employees, and so on.

Wrapping it Up

Recessions are considered an unavoidable part of the business cycle. There are booms, and there are busts. But knowing the factors (which are often inter-connected) that contribute to a recession, and keeping an eye out for them, can help you prepare yourself and your finances for when the next one might be about to hit.