Slightest thoughts of recession can be scary, however, it may be beneficial to understand what it is and how we can get through it. Covid 19 has once again brought a scenario of global recession. And, it’s high-time that everyone, from students or commoners should know everything about it. Let’s begin with knowing the basic meaning of recession:
What is recession?
An economic recession is a time period of economic downfall or decline. It is signalled by a massive increment in unemployment, a huge dip in the housing sector and a decline in the stock market.
Officially, a global recession is not declared untiled the GDP (total value of goods and services) declines for two or more than two quarters.
Recession during COVID-19 time-period
Though there are various lessons that can be learned from global recessions that ever happened, yet there is a big difference between the previous ones and the COVID 19 recession: None of these economic downfalls were brought down by a worldwide pandemic.
Another crucial thing is to understand about global recession is that it is merely a normal part of the economic cycle. As per the National Bureau of Economic Research, an average expansion time period stays up to 59 months, or only of five years. For instance, the last major global recession ended in year 2009. Its recovery was started in the midst of 2011. This is the reason why mostly economists claimed that we were overdue a global recession, even before we got hit by novel coronavirus.
Economic Downfalls of Global Recession
Everyone knew that the cyclical nature of economic growth and businesses would put us into another global recession. What everyone has no idea about was that it would coincide with a once-in-a-hundred-year worldwide pandemic. This pathetic and daunting combination has given birth to economic downfalls of near-historic proportions, such as:
- Unemployment: Only in the USA, more than 38 million people filled jobless claims. This happened only during the 9 week period starting from 12TH of March. March saw only the initial phase of COVID-19. This figure has no or may have just a slight mention of freelance and gig workers, who could not register for unemployment claims. Also, the people who faced massive cuts in their salary were not counted.
- Stock market: Dow Jones experienced a 2,997 point drop, the largest in its 123-year-old history, on March 16. It’s impossible to know whether the stomach-turning drops in the stock market are due to the novel coronavirus or a bull market that has run its course.
- Housing: As per the National Association of Realtors (NAR), the total house sales were expected to decline by 39.5% in the second quarter of 2020. These numbers are expected to have a rise after the COVID 19 gets away, but currently they are unfortunate reality adding to the global recession.
- GDP: Millions of Americans were sheltering in place, hundreds of businesses were shattered. All this was reported in March 31 when Goldman Sachs economists predicted a major 34% drop in GDP in the upcoming months.
- Consumer confidence: The Global Consumer Confidence Index surveys show that there are more than 17,500 adults below the age of 75 in around 24 nations. The Global Consumer Confidence Index of June was 40.0, 8.7 points below than the number of January, and this is problematic. This situation occurs when consumers spend less due to insecurity and eventually slows down the economy as a whole.
Why Global Recession occurs?
Economists hold different opinions on number of recession. As per the varied views the USA is currently going through either 45th or 47th economic recession. The remarkable point is that none of the two recessions have been exactly same. But the factor that are still common, includes:
- High inflation, high interest rates or both: High interest rates restraint the amount of money available for borrowing. This can indicate the start of a global recession. On the other hand, inflation is basically a situation wherein the prices of daily goods and services like gasoline, groceries and other consumer items see a high rise.
- Real wages: The term “real wages” is given to the extent to which our income can stretch. “Real wages” don’t buy as much. For instance, if someone earns $50,000 in Kalamzoo, you can buy a house and have a comfortable life. The same $50,000 is not going to give a fairly comfortable life in Las Vegas. When recession begins, the real wages begins to shrink.
When real wages start to shrink it instigates fear in consumers and they lose confidence. This is because they realize that their income is not in pace with inflation. They eventually stop their regular spending pattern. All of this ends up in an overall slowdown. In fact, one of the reasons the U.S. government passed a $2 trillion stimulus package in March 2020. It was done to keep Americans spending money and the economy chugging along until the novel coronavirus threat has passed. The Senate may have to think about another stimulus package by the end of the year.
What people face during a global recession?
Have you ever seen or imagined a snowball growing bigger as it rolls down a hill? If not, try imagining it. Because recession gathers power just like a snowball going down. One after another economic indicator gets trapped in a global recession, and here is what follows:
- GDP falls drastically
- Businesses cut back their costs in order to survive recession
- When companies do cost-cutting, it leads to layoffs.
- People see massive layoffs, many get unemployed. This instigates fear in people who are still employed and they start saving more. All this ultimately results in less spending.
- Assets like homes and stocks lose value.
- Government debt increases when it tries stabilize the economy.
- The Federal Reserve cuts interest rates with a view to stimulate growth.
Difference between Recession and Depression
You may already have an idea that depression is scarier and severe than a recession. We will see a basic differentiation to see is it like that. Generally, a recession indicates contraction of a particular phase of business cycle. When global recession takes place everything slows down for a time-period of at least two quarters.
In opposition to this, a depression is a huge prolonged time-period of global economic downfall. During depression, major economic indicators face decline. For summing up, we can say both of the below-listed factors set a recession apart from a depression:
- Severity: When economic indicators contract (or weaken) for two quarters, it is considered a recession. A depression causes economic indicators to decline more significantly.
- Length: A depression is deeper and lasts longer than a recession. For example, the Great Depression of 1929 lasted 43 months, whereas the Great Recession lasted 18 months.
How long does a recession last?
Although the Great Recession lasted for 18 months, it was unusual. If you take it out of the equation, the other 10 recessions since World War II have lasted between six and 16 months, or an average of 10.4 months. It’s important to note that the U.S. economy falls apart and rebuilds itself quite regularly. What set the Great Recession apart from other recessions was how long it took to rebuild. The same may be true of the current recession.
Worst Global Recession in History That Ever Happened
Before the current COVID-19 recession, the Great global recession of 2007-2009 was considered as the most severe downfall ever occurred. The IMF ranked it as the second-worst downfall in the existence of mankind after only the Great Depression. The recession of 2007-2009 was fueled even more when the U.S. real estate market collapsed. It was caused by a subprime mortgage crisis (when banks give mortgages to those who were clearly not in a state to repay the loan).
Just like the present financial crisis, the Great Recession was also a perfect storm for a downfall. The subprime mortgages were recorded as the first snowball at the top of the hill. Many homeowners who had gotten in their heads became defaulters in paying off their loans. Defaults dotted the real estate market hugely, and home values plummeted. Even those who were not keeping up on their mortgages lost equity all of a sudden. When worried investors started selling off in a hurry, the stock market got affected severely. Ultimately, the banks collapsed and much of the global economy got sucked down.
Recession and its affect on an average person
The recession will affect everyone in some or other way. Those who lose their jobs have direct impact of global recession. Those who don’t lose it, are likely at risk of losing value of their retirement accounts. Some have massive pay cuts while for some the value of their assets, stocks or homes would be much less than they were before the recession. When more people start losing jobs, there will be a rise in bankruptcies and foreclosures. This means that some of the homes around you will stand empty.
One of the most long-lasting influences of a recession can be emotional as well. There was a study published in the Clinical Psychological Science showed that those who faced a house-related, job-related or other financial hardship during the 2007-2009 recession are more likely to get signs of anxiety, depression and drug years. This can happen years after the recession.
Each and every person is not always directly influenced by the economic fallout from a recession. However, everyone is likely to know someone is facing direct impact of global recession.
Do house prices always decline during a recession?
A one word answer to these question would be “yes”. For a lot of people, house prices will reduce in the time of recession. In order to foresee to what extent the house prices could dip, the real estate giant Redfin carried out a research on what happened to house values in the last recession. They found that the average house value reduced by 9% every year during the Great Recession. Single-family houses that hold their value the best (lost an average of 8%). Townhouses lost about 9.3% value every year and the condos lost 13% value.
The major reason for the reduction in house values was consumer anxiety. Out of fear, they feel insecure about their jobs, this is why they are refrain from paying a top dollar for house purchase.
How to survive in a Global Recession?
These are three ways which will let you survive a recession. Try incorporating them in your habit and you will ride out the tough phase without major harm:
Reduce unnecessary expenses
Recession is a time-period when you need to look back at your spending pattern. Even if you doing well, don’t overspend. Because, anyone can face direct impact of economic downfall. If you are a student, don’t take the situation lightly. Keep a check on your activities, go for cheap assignment help, eateries, travel options etc. If you are doing a job cut your Cadillac cable packages to basic, switch to less expensive streaming expenses. Do not buy unnecessary subscriptions.
Make more meals at home, consolidate high-interest debt into a lower-interest personal loan, stop smoking, shop for lower insurance premiums, grow a garden, reduce utility use, and find other ways to cut your budget for the time being.
Try to diversify your income
If you are at the verge of losing your job or already stand job-less, don’t let stress come over you. You can use this time to learn a new skill that may bring a better job and career prospects. You can take online class and internships.
Pay off your debt
Use your emergency fund wisely. Try to pay your debt to stay stress-free even you have to use a large amount of emergency fund for that. Because, if you will default the payment, eventually it would turn into a major financial hardship in future. If it is not possible for you to pay debt try shifting your credit card debt to 0% balance transfer card.
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