The whole world has been dealing with turbulent economic times in the past year and the fears of recession have been a common topic in the news.
As the economy struggles, businesses and individuals are facing a number of challenges too. However, the word recession can have very different meanings to each of us – some may even see it as a financial opportunity. This article will explore the issues surrounding recession and how it affects us differently.
What is a recession?
A recession is a significant decline in economic activity that lasts for a sustained period of time (at least 6 months). In the most normal of times, a country’s economy is expected to grow, however, during a recession, the GDP (Gross Domestic Product) reduces by at least two consecutive quarters. This essentially means that the value of goods and services produced in the country declines for two three-month periods in a row. The last time Europe and the US saw a recession was during the 2020 Covid-19 pandemic. The largest global recession in recent history was in 2008, caused by a subprime mortgage crisis.
Are we currently in a recession?
The constant bad news surrounding the cost of living crisis as well as many other economic issues may leave one thinking that we have already entered a recession. However, as of yet, the global economy seems to have avoided it and some countries are even predicting potential growth in the next quarter. For instance, the UK is reporting signs of economic recovery due to order increases seen by local businesses, while China has set a 5% growth target for the year of 2023.
On the other hand, the economic conditions remain incredibly volatile as we continue to deal with numerous events and issues globally, which put us on a brink of recession during 2022. The war in Ukraine has been significantly damaging to the whole of Europe, with a surge in energy prices leading to failing businesses and a cost of living crisis.
Additionally, we are still recovering from the effects of Covid-19 pandemic as well as supply chain issues, particularly the semiconductor and the logistics industry. Lastly, the US economy has recently taken a hit due to the collapse of Silicon Valley Bank, introducing a potential banking crisis.
All of the issues described affect the economy dramatically, causing rising inflation, reduced consumer confidence and, ultimately, a stagnant GDP. And, it’s not totally by accident. Central banks around the world have been increasing interest rates for the past 12 months to tackle the issue of inflation, knowing that it brings greater risk of recession.
We are yet to see a consensus among analysts for how 2023 will play out. Whilst the recent banking crisis could further damage consumer confidence and investment, it may bring forward expansionary policies.
The effects of a recession
A recession can have a wide range of effects on both individuals and the economy as a whole. One of the most significant effects is increased unemployment, which is caused by businesses struggling to stay afloat and, as a result, laying off workers. Increased unemployment will also have a ripple effect on the economy, as more people are struggling to meet ends and become eligible for government payouts.
Furthermore, consumer spending also reduces during a recession, which puts thousands of businesses at risk of insolvency. Naturally, when people are losing their jobs or lose trust in the economy, they tend to spend a lot less money.
Similarly, investment activity may also slow down during a recession, since it becomes much more risky to put trust into businesses which are struggling to gain any sales. Of course, some more active traders may find opportunities within this, like Plus500 Futures traders. Futures trading involve margins, however, and this kind of leverage brings even more risk with it.
Beyond traders, a first-time property buyer may benefit from significant decreases in house prices and fast growth on their investment as the economy recovers long-term.
Recession-proof industries
While no one is truly immune to the effects of recensions, certain industries are more equipped to survive its challenges than others. These are typically industries that provide essential products or services, which cannot otherwise be replaced.
A good example of such an industry is healthcare. People will always require healthcare services, regardless of the state of the economy, which is why the industry tends to remain relatively stable even during a recession. The education industry also falls under the recession-proof category, as people will continue pursuing education during a recession.
When it comes to the retail industry, however, the effects are mixed. People will continue to purchase basic necessities like food and household supplies, so businesses will continue producing these items. However, the average consumer will decrease their spending only on necessities while completely avoiding the more luxury items.
All in all, the majority of countries around the world have been trying to avoid a recession during the past 12-months, due to the many significant economic events we have been dealing with globally. While a small percentage of people or industries may benefit from a recession long-term, as a whole, it is a highly devastating phenomenon that negatively affects people and brings failure to many businesses.