In recent months, you may be hearing in the news that the global economy is in a state of recession or economic downturn.
When a recession or economic downturn hits a country, or the entire world, growth is moving slowly. As a result, unemployment is at an all-time high, shops and companies are closing down and many people are in debt. Investments and trading are also affected since the economy is at a standstill.
During these downturns, its impacts can be detrimental to the country’s growth and development especially if it happens for a long period of time. It is also unpredictable, making it hard to counteract. But, when there are signs that reflect a positive outlook, the market can recover easily.
How can we tell that we’re experiencing recession?
You can tell if a country’s economy is doing well based on its gross domestic product or GDP.
The GDP of each country reflects the total value of a country’s produced goods and services throughout the year. If it drops in value in one quarter and then the next, that is what experts call as an economic downturn.
Meanwhile, if the GDP remains low for two consecutive quarters, the economy is in a state of recession.
Aside from a country’s GDP, countries can tell if they are having economic problems if there is a steady increase in unemployment, negative consumer reviews and dwindling productivity.
How long does a recession last?
Governments and economic institutions cannot call for a situation to be classified as a recession unless it has been going on for six months or two financial quarters.
An economic downturn may not immediately follow when there is a recession. But, there are times it may happen immediately depending on the factors that caused the problem.
Normally, recessions don’t last for a long time in comparison to economic expansions. For example, during the 2008 Great Recession, it only lasted up to 18 months.
What factors cause the economy to decline?
Economies follow a regular cycle so there will be times that it will experience downfalls and upturns in certain financial quarters. But, there may be certain events and factors that can lead to economic decline.
In first world countries like United States, there are three major factors that triggered the 11 recession periods it experienced:
- Changes in the commodities market
Changing prices in major commodities such as oil has caused several problems for the US in recent years. In 1973 and 1974, the US experienced a shortage in oil supplies after the OPEC increased oil prices and froze oil exports bound to the country.
The resulting impact on the high prices and embargo order triggered an increase in gas prices throughout the country and a long recession.
The US was able to get things under control and established the Strategic Petroleum Reserve, which guarantees that the country will not lose crude oil reserves during economic changes.
- Changing Federal Reserve Strategies
The Federal Reserve has triggered several economic recessions for the US each time it introduces new policies regarding interest rates.
For instance, the 1981-1982 recession was caused by the increase in interest rates, which reached up to 19% for federal funds.
Stock and property valuations can also affect the economy and if it is done incorrectly, it may cause recession.
The most notable example to this is the 2007 housing crisis and the Great Recession that followed after it. During this period, real estate prices shot up immensely that caused many Americans to lose their homes and prevented economic growth.
How often do these recessions occur?
The world has experienced a recession every four years since the beginning of the 1900s. However, they do not happen regularly.
During these early times, the economy was still developing and it was common that products and services will vary on how well it does in the market.
Since the end of the Second World War, the world is under a state of economic expansion which lasts up to 100 months. Recession is avoided through improved economic policy and constant data analysis.
What should you do when a recession hits your country?
Economic downturns are hard to predict, and sometimes, various factors will determine how severe the downturn will be.
The best way to prepare for a recession is by sorting out your finances. Start a savings account where you can put funds that you can use for your basic necessities and medical coverage. Some savings accounts come with high interest rates, so check with your bank about their offerings.
You should also invest for the future such as buying mutual bonds or life insurance and building up your retirement funds. Some of the best investors in the market look into the stock market as a great way to invest.
If you plan to go through this route, you should not buy and sell stocks haphazardly because of the economic situation. Have a clear investment plan in place that matches your needs and risk level and stick with it.
Experts also say that it is best not to market based on economic predictions because anything can happen in the global and national economy.
Can we pull back from the recession?
After every economic downturn or recession, the economy will definitely recover but it won’t be immediate. During the 1960 economic recovery, it took 100 months for the global economy to record a 50% growth.
Currently, the economic expansion happening is recording a 20% growth in the past 10 years. While there is still growth, some experts believe that the recovery growth is not very strong as compared to other expansion growth in previous years.
The improvement of the stock market also varies from the growth of the economy. One study said that the stock market grew by up to 300% from 2009 to 2019.
The Covid-19 situation is bringing economy at a standstill in most countries. While there are previous recessions before, there is nothing like the current situation now where everywhere is affected yet recovery is at different stages. There are too many unknown factors underlying such as second waves of infection or the impending vaccine results.
The good news is that we have survived many recession even the The Great Depression, we will survived this one too. Eventually. Meanwhile, keep your eyes peeled for opportunities and stay positive.
For more economy related articles, here are some that may interest you:
Freelancer’s Survival Guide to Economy Downturn
What You Can Do During Covid-19 Lockdown Period to Make Yourself Attractive to Managers & Recruiters
What should we do to minimize COVID-19’s economic impact?
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