A recession is a severe decline in economic activities for a long period of time. Economic experts declare a recession is when a country’s economy experiences negative gross domestic product (GDP), high and rising cases of unemployment, plummeting retail sales, and contracting measures of income and manufacturing for an extended period of time. Recessions are believed to be a common occurrence especially when there’s a regular pattern of expansion and contraction in a country’s economy.
During a recession, the economy struggles, people lose their jobs, companies make fewer sales, and a nation’s overall economic output declines. The point where the economy officially falls into a recession is dependent on various factors.
in 1974, Julius Shiskin, an economist defined several rules that define a recession. The most common was a declining GDP for two consecutive quarters. A healthy economy expands over time, therefore, two contracting quarters in a row signify that there are several underlying issues.
What Causes Recessions?
These phenomena explain what causes a recession.
- A sudden economic shock. An economic shock is a problem that comes as a surprise that creates a lot of financial damage. For example, the 2020 COVID-19 pandemic is an example of economic shock because it shut down economies worldwide.
- Excessive debts. Growing debt defaults and bankruptcy can impact the economy.
- Asset bubbles. Bad economic results are never far away when investing decisions are driven by emotions. Its very common for investors to get excited and optimistic during a strong economy. This extreme excitement can inflate the stock market or real estate bubbles- and when the bubble bursts, a recession can occur.
- Inflation for a long time. Inflation is the stead rising of prices over time. Inflation is not a bad thing, but too much inflation can be negative. Central banks control the inflation rates by raising interest rates, and higher interest rates depress economic activity. Federal Reserves abruptly increase interest rates in an effort to break the cycle, which brings about a recession.
- Deflation for a long time. Deflation is when prices decline over time which causes wages to contract, which further depresses prices.
- Changes and advancement in technology. Over time, new discoveries boost productivity and benefit the economy, but there may also be a short period of acclimatization to new developments in technology.
What’s the Difference Between a Recession and a Depression?
Recession and depression have similar causes however, a depression has a far, much worse total effect. Greater job losses, high levels of unemployment, and steeper GDP decreases are all present. A depression lasts for years rather than months, and it takes longer for the economy to recover.
How Long Do Recessions Last?
The average recession lasts 11 months. The most common recessions are the Great Depression of (December 2007 to June 2009) and the Covid-19 Recession.
Can You Predict a Recession?
Prediciting recessions is far from easy. For example, in 2020, the COVID-19 recession was something that happened out of the blues. Within a few months, the global economy had shut down and people had lost their jobs.
That being said, there are several indicators of a impending danger. The following are ways you can predict a recession and prepare before hand.
- An inverted yield curve. A yield curve is a line that represents the yields (interest rates) of bonds with similar credit ratings but various maturities. The yield curve’s slope provides insight into potential future changes in interest rates and economic activity. Longer-term bond yields should be higher when the economy is running normally. Although it indicates that investors are concerned about a recession when long-term yields are lower than short-term yields. A yield curve inversion is a phenomena that has previously been used to forecast recessions.
- Sudden decline in the stock market. A sudden decline in the stock market could be a clear sign of a looming recession. This is because investors may sell off all of their possessions.in advance of an economic slowdown, investors may sell off all of their possessions.
- An increase in unemployment. Without a doubt, it is a poor indication for the economy if people are losing their jobs. Only a few months of significant job losses are a strong indicator that one is about to occur.
How does a Recession Affect Me?
You may lose your job during a recession. Since more individuals are unemployed, it becomes much tougher to get new job replacements in addition to losing your existing one. Those who keep their positions may experience pay and benefit reductions and find it difficult to negotiate pay increases in the future.
A recession can cause investments in stocks, bonds, real estate, and other assets to lose money, decreasing your savings and disrupting your retirement plans. Even worse, you can risk losing your home and other possessions if you are unable to pay your expenses as a result of losing your work.
During a recession, lenders tighten requirements for mortgages, auto loans, and other forms of finance as more people find themselves unable to pay their payments. As would be the case in more normal economic circumstances, you need a higher credit score or a greater down payment to qualify for a loan.
Ultimately, a recession is a traumatizing experience. However, the silver lining is that recessions do not last forever.
So are we in a Recession?
While many people are still panicking about a looming recession, the answer is no. The global economy might not be headed to a recession but it is not looking good. Consumers still struggle with high inflation rates but hopefully, prices will continue to moderate in the coming months.
