With these news making into the front, its time we look at What is Recession?, a Depression?, and what can we do about it?
Welcome to riteFinance, this is your host Ritesh and today we are gonna unveil this curtain of fear!
A Recession is a slowdown in economic activities for at least two quarters. Since the economy is in contraction during a recession, so a GDP, Corporate profits and Employments go down.
So what causes a Recession? A fall in consumer confidence and spending referred to as a demand shock, causes a Recession. And what causes a fall in Spending?, well there are multiple factors like the 2008 financial crisis was caused by the Real Estate Bubble Burst causing a Recession, and the current one is caused partially by Lockdowns imposed by economies to prevent the spread of COVID.
Economies all the time goes through a Boom and a Bust cycle, a high rate of growth followed by slowness. These Bust periods are what is referred to as Recession and it can have one or other factor. Recessions are caused usually by irrational exuberance and soar in asset prices during the economic boom when people become so irrational that they think Economy will never reset again. Now, it doesn’t mean Recessions are good, Credit become difficult, Investors lose money, consumer cut spending, a company cut job etc. And if left uncontrolled a Recession can lead to a Depression.
A Depression is a severe economic downturn which lasts for years (not months or quarters), and its effect can last up to a decade! Currency devaluation, price deflation and Bank failures can occur during a depression.
While since 1984, world economy is hit by 33 Recessions, the depression we know of is only ‘The Great Depression’ of 1929, which lasted for around 3 years.
Is 2020 Recession the result of Covid?
Well to say so, will only be partially correct. Covid acted like a needle in already inflated bubble. Recessions are not caused by a single event. Rise in corporate debt, economic slow down of 2019, China-US trade war and Brexit were some factors that led to the build up resulting in the current recession.
With two quarters down, it is sure we are in a Recession. Question remains however In 2020, Are we heading for a Depression?
To answer, we don’t know, no one knows for sure! But no indicator is currently pointing towards a Depression, Economic revival is the priority of many states, focus on innovation and vaccine to reduce if not eliminate COVID is under way. That said, it is likely we will see more costly adjustments, certain setbacks along the way, but a economic revival even though slow will be underway soon in 2021. Will it be a V shape recovery (a steep decline and quick revival)? I think definitely not, it doesn’t look so, but a longer U shape recovery is likely, the Great recession of 2008 which lasted for around 19 months saw a U shape recovery.
With all this Negativity around, is there a light at the end of the tunnel?
The short answer is Yes!, At least for some.
- Some Business thrive – Grocery stores, Bankruptcy attorneys, Bars, Maintenance services are usually the one that survive a recession. Definitely this depends on the kind of recession for example Bars which usually thrive in recession as the Binge drinking increases will likely be not in a good shape during Covid given the current health emergency and the government guidelines, also another example can be of Online Retail Marketplace like Amazon that are likely to thrive in current crisis, in-fact Amazon has added more jobs, additional 1,75,000 employees during this crisis .
- Efficiency Increases – Inefficient Businesses and the one with on-going difficulties are the first to go Bankrupt during a recession. While a Business that can streamline itself, find alternatives and reduce its costs survives easily.
On an Individual or Consumer level –
- Change in Mindset – Recession forces you to reflect back on your expenses, cut some unwanted expenditures, look for alternatives, streamline personal finances, and set up an emergency fund, making you more efficient.
- Crisis as an Opportunity – Every crisis comes with an Opportunity, that is why it is believed more Millionaires are made in crisis than any other time. While it is a harsh reality Recession can create more income inequality due Govt. policies, printing of more money, and can result in inflation, Nevertheless it gives you as an investor to buy some big firms (I mean a piece of them – stocks) in big discounts. Only if you think like a Minority and do your due diligence as an Investor. We have a few resources to get you started and more coming up soon (watch out for this space).
Link to Resources for the Minority
- You must have an Emergency Fund before Investing How? Why?
- Things to know before Investing
- Mistakes to avoid Investing
- Take advantage of commodities like Crypto to hedge
- Lost job what should I do
- Some external resources to learn more
- Lets hear some cheer for Index funds
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”– Warren Buffett (Legendary Investor)
News Update – GDP Decline in Second Quarter : Spain 18.2%, France 14%, Germany 10%, United States 32.9% (worst economic contraction)
Keep Learning, Keep Investing! Thank you Readers.