What is a recession?

Much about recessions is shrouded in mystery. But there are a few things we know. According to one popular definition, a recession is two consecutive quarters of economic contraction. And, in general, recessions are caused by imbalances in the market, triggered by external or internal factors. But to repurpose Tolstoy’s famous quip about unhappy families, each recession is unhappy in its own way—as we’ll see in three case studies highlighted below.

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Alex Panas and Kelsey Robinson are senior partners in McKinsey’s Boston office, Asutosh Padhi is a senior partner in the Chicago office, Ida Kristensen is a senior partner in the New York office, John Kelleher is a senior partner in the Toronto office, Stephan Görner is a senior partner in the Vancouver office, and Sven Smit is a senior partner in the Amsterdam office and chair of the McKinsey Global Institute.

Recessions often cause (or follow) big declines in asset prices. It’s human nature to follow the pack, and it takes nerves of steel to stay in the game when everyone else is getting out. In business, a steady hand—and meticulous preparation—can help steer the ship through the storm intact.

Read on to learn more about recessions and concrete steps companies can take to minimize their impact.

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Case study: The Great Recession (2008)

The financial crisis and recession of 2008 were caused primarily by an imbalance in which banks lent more money to homebuyers than the borrowers could ultimately afford to pay back. As long as housing prices continued to rise, the imbalance was not a problem. But when housing prices started to fall—a possibility that many credit models did not include—homeowners struggled to pay their mortgages, and banks started having financial problems. This triggered the recession.

Are we in a recession now?

Economic signals are mixed, and uncertainty remains high. A new era appears to be on the horizon, heralded by trade policy changes, geopolitical disruptions, transitions of political leadership, and the advance of AI. A wide range of medium- and long-term economic scenarios are in play.

A recession is possible in the near future. In March 2025, J.P. Morgan’s chief global economist put the risk of a recession in the United States at 40 percent, up from 30 percent at the beginning of the year. The chief economist at Moody’s Analytics also increased the probability, saying the odds of a recession in the United States were at 35 percent as of March, up from 15 percent. And they’re in good company: 95 percent of economists polled by Reuters in March 2025 across Canada, Mexico, and the United States said recession risks in their economies had increased.

But there are also indicators that the future will be both prosperous and sustainable. Business leaders who invest in the future while being mindful of ongoing uncertainty will be best placed to come out ahead. These efforts can include upskilling workers and changing how their organizations operate, striving to offset higher input prices and interest rates, and carefully targeting capital and technology investments.

Case study: The Great Depression (1929–39)

This financial crisis is the benchmark by which all others are measured. In 1929, stock markets crashed, setting off a deep and lasting global recession. Economists have proposed many theories about what caused the imbalance that led to the crash. Some argue that a string of bank failures caused considerable wealth to evaporate, lowering the money supply by a third. Others believe the Depression was triggered by insufficient consumer demand, which governments tried to address during the 1930s with deficit spending. A final group thinks the market crashed because of a surplus of credit, such as the margin loans that investors used to speculate on stocks.

Are recessions inevitable?

Yes, according to modern economic thought. Prior to the late 19th century, most economists believed recessions were caused by external factors, such as wars and extreme weather events. Neoclassical economic thinkers developed the idea of business cycles: alternating peaks and troughs of economic expansion and contraction. Recessions, they argued, start at the peak of the cycle and end at the bottom of the trough, which is when the next period of expansion begins. Today, we know that recessions are caused by imbalances in the market. While we can’t know when the next recession will come, or how much value will be shed, it’s pretty much guaranteed that another recession will come around sooner or later.

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Can a recession be predicted?

Recessions happen—that’s just the price of doing business in a capitalist system. The ability to predict when one will happen would obviously confer a lot of benefits to societies, businesses, and individuals. But foretelling the future is always a risky and uncertain proposition. As the old joke goes, experts have predicted seven out of the last three macroeconomic events.

That said, there are a few things we’ve learned about recessions, according to McKinsey Senior Partner and McKinsey Global Institute Chair Sven Smit. The market imbalances that cause recessions can be caused by geopolitics, economic cycles, and many other forces. The financial sector is always involved. Recessions usually start in one geographical area and spread to another. And unfortunately, higher volatility in the business environment has become a new normal.

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Case study: Asian financial crisis (1997)

The Asian financial crisis in the 1990s was caused by an imbalance in which too much money had been invested in factories. In the late 1980s and early 1990s, companies in Southeast Asia invested huge sums in building factories to make products for export. This created too much capacity; factories couldn’t fully use the new equipment. As a result, they couldn’t service their debt. When enough companies began having serious financial difficulties, that led to a recession.

How are different companies prepared for uncertainty?

Companies head into periods of uncertainty—like the unprecedented current economic climate—with varying degrees of readiness and health. Most fall into one of four camps:

Some are poised to thrive. These businesses experience relatively steady demand for high-margin products, easily attract and retain talent, and have simple supply chains. From a financial perspective, they have strong balance sheets, low leverage, and lots of cash. These companies are the lucky few.
Another category of companies is more susceptible to a slowing economy. These companies have more complicated supply chains, smaller market share due to new competitors, and thinner margins due to inflation. These companies can resolve to reform.
Other companies are in worse shape and will fight to survive a recession. These companies have balance sheets loaded with debt, low cash reserves, and potentially high exposure to geopolitical disruptions like Russia’s war in Ukraine.
A fourth group of newer companies have thus far primarily focused on growth and market share, rather than profitability. The challenge for these companies is to pivot to profit, as funding usually dries up in a recession.

Companies in all four categories should focus on building systemic resilience. Any company can benefit from putting in place some essential defensive elements, such as cost cutting, price adjustment, cash preservation, and shoring up supply chains. Offensive tactics can also be useful; these include programmatic mergers and acquisitions, new-business building, and better talent attraction and retention.

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What do executives believe will affect the global economy in the coming years?

According to the latest McKinsey Global Survey on economic conditions, conducted in the fourth quarter of 2024, executives believe that trade policy changes and geopolitical instability will most affect the global economy in the coming years. Political transitions weigh on respondents’ minds, as does the potential for increased unemployment and higher interest rates. Looking by region, respondents in North America believe political transitions will have the biggest economic impact; in Europe and Asia–Pacific, respondents cite geopolitical instability, and in Greater China, executives are most focused on trade-related changes. But generally, executives are more likely to expect improvements in the coming months rather than worsening conditions.

How can business leaders prepare for the next recession?

Recessions are like health problems—at some point in our lives, we’re likely to face some sort of issue, whether it’s minor or major. The healthier you are to start with, the more likely you are to come through just fine.

According to Sven Smit, the healthier a business is today, tomorrow, and next quarter, the more resilient it will be in a downturn because it will have a buffer to take on new, unexpected challenges.

One way to prepare is to put in some prep work now for the next recession, whenever it comes. That means doing scenario planning, putting together a risk management strategy, ramping up your organization’s agile processes, and ensuring your organization has rock-solid environmental, social, and governance (ESG) metrics.

Case study: The 1973 oil shock

On the surface, many recessions seem to be defined by one event, but in reality, there are many factors at play. In the fall of 1973, that event was the embargo imposed by OPEC on oil exports to the United States. The prices of oil and its byproducts shot up immediately, exacerbating an already inflationary environment. The contagion spread to US stock markets and economies around the world. Today, the recession that resulted, which lasted until 1975, is often remembered for its “stagflation,” a rare and dreaded combination of stagnating or shrinking growth, rising inflation, and rising unemployment. In many advanced economies, GDP growth turned negative, while inflation and unemployment rose to 8 percent or higher.

What are the implications for people when a recession hits?

Businesses and institutions have responsibilities to the people they employ and to wider society. Companies that lay off staff have felt the backlash from communities, customers, politicians, and workers. “We are not living in a Milton Friedman–esque system where if you don’t have demand, you just fire the people and the market will solve what happens to [them],” says Sven Smit. Conversely, a recession only intensifies society’s demand that businesses and governments be run responsibly.

What’s more, layoffs don’t necessarily save as much as other cost reduction methods. Two years of research focusing on major manufacturing businesses across a range of sectors show that traditional cost reduction methods (such as layoffs) save only about 2 percent in costs, while using digital and analytics tools can save about 5 percent.

But recessions do demand change. One way companies might fulfill their responsibilities to their people is by investing in reskilling the existing workforce to meet the requirements of the changed organization.

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How did the most resilient organizations weather the Great Recession?

According to McKinsey research on how various companies fared during the Great Recession, some companies are significantly more resilient than others. These organizations distinctly outperformed their peers and beat market total shareholder returns. What were the resilient companies doing differently?

For one thing, they focused on margins, or the difference between the selling price and production cost for a product or service. Companies that showed resilience during the Great Recession focused on improving their margins during the recession through proactive operational cost cutting, which less resilient companies put off until after the recession. Resilient companies were also more likely to have divested themselves of underperforming parts of the organization, which they were then able to reinvest in ways that reflected the new economic parameters.

Continued investment can be scary in a recession—hitting the brakes when the road gets shaky is a natural reaction. But organizations that invest in pockets of known demand have shown resilience in downturns. Another way to approach a recession is to keep an eye on opportunities that come up when competitors make a misstep. Snapping up assets and talent shed by competitors allows organizations to take a proactive stance in a recession. That’s a position of strength.

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