Recession: reasons and repercussions you need to know
The absolutely dreaded duration of transient economic deterioration during which the trade and industrial activity are subsequently subtracted has another name : Recession.
This term which sends a sense of disquietude down our hearts is recognized by a decline in GDP in two consecutive quarters.
When the corona crisis hit the global economy hard, nations struggled to recover from this, some still are.
A similar downturn in economic activity was also seen when the Russia-Ukraine war arrived.
Yes, these two major events are anticipated to be the main factors to shake the global economy and leave it at the edge of Recession by the time 2023 is here.
The Data so far
It has been predicted that the global output would have risen 23 per cent since 2016 if the Corona Virus had not changed our lives. However, now the numbers projected indicate that it has grown only 17 per cent.
This global setback will have us left with the GDP below its pre-pandemic data. It is believed that this will cost the world more than $17 trillion, which is right around 20 percent of the world's present income.
This global output loss would be seen in countries like the UK, Russia, Germany, Indonesia and India according to a report observed by the United Nations Conference on Trade and Development (UNCTAD).
India can be expected to survive an output loss of 7.8 per cent in 2023. Germany is expected to lose 5.1 per cent, China 5.7 per cent, the U.K. 6.8 per cent, and Russia can bear 12.6 percent output loss.
The anxiety around the global markets grow with the rise in interest rates, weakening currencies and ascending public debt which are becoming major promoters in the mounting of food and fuel rates.
Hence it is now all the more important to learn about these economic terms even more ferociously. With economists and financial analysts throwing around the word vigorously, it's time to brush up the basics.
The estimation of economic growth
Now that we know that recession depends on the degree of growth within an economy, let's take a step back and break down the process of how economic growth is estimated within a system.
While the times are stable, consumers spend money and the quality of their life is better. They invest in higher quality products which contribute to the economy, leading it to grow lavishly.
Gross Domestic Product or GDP is the most crucial criterion of growth in an economic system.
This metric calculates all of the economic cost that is created across every industry and job in the whole country and presents an overall output of the country.
This is the reason there is a multitude of demand among the service sectors. Since there is more quality output with people consuming it consistently the economic value which is calculated presents a higher GDP.
A very simple example would be of a supermarket. When the times are stable the earning individual might get an increment and the second individual in their household gets a temporary job. Now these two have enough money to afford high quality products like meals, cosmetics etc.
They purchase branded goods which are often expensive, explaining how the supermarket would be getting a higher profit compared to what they will earn if a customer buys cheaper low quality items. This high paying household increases the GDP.
Now, during a recession the earning individual with a stable job might not get an increment anymore while the one with the temporary one could be unemployed now. Less money means no more high quality branded goods leading to the supermarket receiving less money. Now this once high paying household is not making a very positive difference in the GDP.
This pattern follows around every economic system. In stable times we tend to buy high quality products leading to a positive contribution in the GDP.
Recession: what is it ?
The period of sustained negative economic activity is coined as Recession where the economy shrinks and households have less money to spend.
Primarily a recession is when the economy had two consecutive quarters (six months total) of negative economic growth. This definition is still used widely around the globe as a good rule of thumb.
In the United States, The non-partisan government body the National Bureau of Economic Research (NBER) declares when a recession has officially hit. They take a versatile range of data to analyse the former which is more than determining the GDP of a country.
Have we entered a recession ?
We ended up being in the shortest recession ever since the Economic growth was negative for two consecutive quarters at the start of 2022.
Though it wasn't an official recession.That’s because there has been other economic data that’s not been quite as negative.
Though in the entirety of these periods the growth remained negative and the unemployment persisted, consumer spending was high.
Even Salaries were raised but that was because of the high levels of inflation which is still a decline in real terms.
What causes recessions?
Recessions can be caused by a wide range of factors.
1.As witnessed by the world, the most current recession was inflicted by a global pandemic which shook the economy across the entire world.
2.Wars like WWI and WWII can lead to a recession.
Property bubbles and exorbitant degrees of debt can also contribute to recession.
3.Another case could be of a highly successful and investor attracting domain which can cause a recession if it closes down for some reason. For example the 9/11 terrorist attacks, which further alarmed the markets and spread stress through the entirety of economy.
4.Other reasons for a recession can be related to interest rates, oil prices and high inflation.
Challenges of Recession
There could be a number of challenges during recessions.
1. The first is the employment status. When the economy is shrinking, some sectors could be vulnerable to layoffs and hiring freezes .Other companies are more resilient to the rise and fall of the market.
2. The other challenge could be investing. A sense of panic and confusion can come from seeing the depleting health of your country's economic system.
How to invest?
There are a wide variety of paths to invest properly without any risks.
1. The first is to invest in assets that have been seen as ‘safe havens’. Assets like gold and other precious metals, specifically silver, platinum and palladium are a safe and magnificent way to start your investments.
2. The second way is to invest in the Large Caps. Usually economic growth is tardy. Big companies tend to outdo minor and medium sized ones.