What is a Recession and what can you do about it?

(recession – 5 minute read)

The image shows comic sam sliding down a graph chart which represents the economy pointing down towards a recession. While sliding, comic sam is screaming 'NOOOOO!'

Well, ok. It seems that I can’t scroll five articles without reading about the oncoming global recession. Like this piece here blaming consumers for it, yet another ‘not if but when’ piece by an economist and of course the world’s richest ‘free speech absolutist’ had to say something about it.

So yes, it’s everywhere. But we’ve been here before. At the onset of the pandemic, waaay back in 2020, we wrote about the recession happening (soon-ish) and that we were long overdue for one. Once again, we’re standing at the cusp of yet another recession. As before, everyone is asking:

‘What is a recession and what can we do about it?,’

The Recession that didn’t happen

Before we talk about the looming recession, let’s talk about the recession that was supposed to happen post 2020. Back then, the pandemic had just started, lives were turned upside down and all across the world, restrictions were put in place to slow the advance of the virus. Many financial and economic pundits (this blog included) predicted that this would lead to widespread economic stagnation and lower consumer confidence. This then would create the conditions which would precipitate a recession.

But it didn’t happen.

This was because we didn’t count on the magnitude of the financial response that governments around the world put into propping up the economy. Billions of dollars were spent to keep businesses afloat and people employed. Dozens of governments around the world went into debt to keep the economy going.

So we didn’t experience a recession. Property and stock prices boomed over the past two years. Multinational companies made record profits.

The Recession that will happen

All good things must come to an end. Governments around the world can’t keep printing endless stacks of cash to keep the economy going. This current wave of inflation that we’re experiencing is partly due to the global economy just being flush with cash. That and ongoing supply chain issues of course. As inflation increases, central banks around the world have resorted to interest rate hikes to keep it down. This creates a double-whammy: The average consumer spends less due to higher inflation driven prices AND they will have less money to spend if they are servicing a mortgage or consumer debt (due to higher interest rates).

A recession is often preceded by a drop in consumer spending. We’re already starting to see signs of that happening around the world.

What is a recession, really?

A recession is defined as a ‘fall in GDP in two successive quarters’ in any economy. From a technical perspective, this means that the economic output of a country shrinks over a period of 6 months.

A recession is not the cause of a slowdown in the economy, it is a symptom of it. By the time we have confirmation that the country is indeed in a recession, we would have already lived through at least 6 months of it (because data is historical and retrospective).

So why is a recession a bad thing?

Recessions have a bad rep because they represent the ‘bust’ in the economic boom-bust cycle. Basically, what goes up must come down. But capitalism would like us to believe that the good times will never end. When confronted with the fact that the good times will actually end, many ‘industry leaders’ refuse to believe it. Then they will make a lot of noise about how a recession is a ‘bad thing’ and proceed to lay off half of their staff to ‘preserve the bottom line’.

People losing their jobs is usually bad for the economy. It creates a vicious cycle – people who don’t have jobs are even less likely to spend money in an economy where people are not spending. This creates a knock-on effect that affects retail B2C (business to consumer) type businesses who rely on the public to buy their products and services. If enough people lose their jobs and stop buying, they too have to lay off their staff, further reducing the pool of money circulating in the economy. These small businesses might even go bust, affecting B2B (business to business) businesses who rely on small businesses to pay them for services.

How does it affect the share market and other investment assets?

When larger companies have their profits affected by the recession, it leads to a devaluation of their share prices. Since the share market is an emotional beast, this has a knock on effect as speculators rush to dispose their holdings, even in companies that are otherwise doing quite well.

This share market movement affects other asset classes like cryptocurrency. Crypto is an entire class of asset who’s value is driven purely by speculation, so literally any economic downturn will sour the mood for cryptoinvestors.

People without an income may not be able to service their mortgages, leading to mortgagee sales, which can impact the property market and this can affect the short term value of properties.

Look, there’s a knock on effect to everything in a recession and for the most part, you should totally expect the value of your investments to fall.

What can you do in a recession?

That’s the question everyone wants answered right? The first thing is to acknowledge that a recession is neither good or bad. It is simply our modern capitalistic global marketplace going through the motions, doing it’s thing. If you can accept this, then it becomes a lot easier to deal with the outcome of a recession.

In our next article, we’ll talk more about how an individual can deal with the oncoming recession. And after that, we’ll talk about how small businesses can weather the recession.

In the meantime,

Stay positive!!