Recession: What does Recession mean and How to Survive it

The global recession seems inevitable due to reduced growth, high inflation, and wage stagnation based on the quarterly publication, named Chief Economists Outlook, from the World Economic Forum. But, what is the meaning of recession? How does the economic downturn affect our daily lives? Please read on!

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What does recession mean?

A recession is a significant economic downturn with limited economic activities, including the decline of production outputs, consumer demands, and employment opportunities, that could last for months or even years. 

There are two ways to define recessions, one of which is to gauge the Gross Domestic Product (GDP) index. As long as GDP has declined for two consecutive quarters, it constitutes as a recession and that’s also what the media always depicts as a “technical recession”. 

As for another definition of recession, it depends on the economists from the National Bureau of Economic Research (NBER), a non-profit and non-partisan organization founded in 1920, to access whether an economy goes into recession based on these three criteria — depth, diffusion, and duration, which are interchangeable. Although each criterion needs to be met individually to a certain extent, one criterion may partially offset weaker indications from another in an extreme situation, according to NBER.

Despite recessions sound daunting, they are also considered to be a brief corrective phase of the business cycle, which consists of four stages: expansion, peak, contraction and trough. For example, the most recent recession began in February 2020, NBER concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be brief and the trough occurred two months after the peak in April 2020 only. Therefore, the recent recession is the shortest one in the history.

What happens during a recession?

A recession will cause a "domino effect" across society. On the individual level, the economic downturn will dampen consumer sentiments since they tend to save money instead of savings. Therefore, if companies make fewer sales as a result of a struggling economy, then it will inevitably lead to massive layoffs and some may even close down businesses to increase the overall unemployment rates in addition to graduates and school leavers added to the job market annually. 

When people can't make ends meet, the over economic activities and productivity will be further reduced and stagnated. That way, the government can't receive more money in taxes, then it will increase taxes and spend lesser on benefits, public services, and government workers' wages, all of which will particularly affect benefit recipients and those with fixed incomes. 

In a nutshell, a recession affects all walks of life, making inequality across society more evident.

How long do recessions last?

It depends! A recession can last for months or even years. As the largest economy in the world, the economic readings of the U.S., such as GDP, interest rate, Consumer Price Index (CPI), Producer Price Index (PPI), and beyond, are always in the spotlight. In other words, if the U.S. goes into recession, the entire global economy will follow suit. 

According to the NBER data, the average recession in the U.S. lasted 11 months from 1945 to 2009 compared with 21.6 months from 1854 to 1919, which showed an improvement over earlier. Over the past 30 years, the U.S. has gone through four recessions, including the Covid-19 Recession, the Great Recession, the Dot Com Recession, and the Gulf War Recession.

 For the Covid-19 Recession, it was the shortest recession in the history of the U.S. among other economic recessions as it began in February 2020 and lasted only two months. Whereas, the Great Recession was the longest U.S. recession since it lasted 18 months from December 2007 to June 2009, which was almost double the length of any recent recession in America. As you may wonder, the differences between “the Great Depression” and “the Great Recession”. The former took place from August 1929 to March 1933, which lasted 3.5 years while the latter lasted around 1.5 years. However, the lingering effects of the Great Depression” continued till the late 1930s. In comparison with the Great Depression, the Great Recession's duration and effects are relatively "mild".

Who benefits in a recession?

Although a recession causes economic costs ranging from higher unemployment, falling wages, and higher government borrowing, some people and industries can battle the headwind and even capitalize on the negative economic growth to grow their assets.

Although inflation and recessions are two different economic phenomena, they are intrinsically linked. When the economy goes into recession, the inflation will generally slow down since businesses will cut the prices to attract buyers, making the market less heated. Therefore, you would usually expect a fall in the inflation rate, or you may describe the situation as stagflation due to lower demand and lower economic activity. That way, fixed incomes' and pensioners' financial stresses will be reduced.

1. First-Time Home Buyers

During a recession, first-time buyers can easily get on the housing ladder thanks to the falling asset prices. As for industries such as healthcare, food, consumer staples, and basic transportation, they can perform well in recessions since they are necessities regardless of the market trends.

2. Pawn shops, Bookmakers and Pubs

Meanwhile, pawn shops, bookmakers, and pubs also do well in recessions sadly because some unemployed people may long for cashing out or making a windfall, or even getting drunk during a hard time.

3. Few industries

Although the bear market seems daunting to investor, it’s also a good time to source and buy bargains. For example, the 2020 bear market was triggered by the COVID-19 pandemic across the world, that’s why stock sector related to health care surprisingly outperformed others during bear markets. Meanwhile, consumer staples and utilities are also a safe choice in the economic downturns.

How to survive recession?

1. Diversify investment portfolio

Understanding the impacts of rising inflation or pending recession helps you make informed decisions and learn how to diversify and manage investment portfolios. First, cash is king during a recession. As the unemployment rate will be increased, it’s better to beef up cash reserves to prepare for any worse scenarios.

However, it doesn't mean that you are in a rush to cash out from your current investments including stocks and funds, which is considered to be risky since you need to avoid putting everything in one basket.

Instead, you should regroup and review your investment portfolios if you have some stocks and funds in hand. The best approach is to shift them into investments that are well-positioned to weather a recession, especially those companies with a strong reputation and reliability (e.g. blue chips), since they are less volatile and allow you to hold for a while before selling it off to make some gains.

2. Try dollar-cost averaging strategy

Besides, you can try the dollar-cost averaging (DCA) approach. It's an investment strategy that aims to buy a fixed amount of an investment on a regular basis, instead of betting on one thing altogether. In other words, you buy a few stocks or funds every few days at a wider range of prices. That way, your emotion is less affected by the market sentiments and you can also avoid purchasing anything at bad timing.

Last, you may also purchase bonds and insurance with savings plans to not only safeguard your hard-earned money but also earn some interest over time. But, please bear in mind that nothing is guaranteed risk-free and you should always be patient to wait for investment opportunities and do your own research beforehand.

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What is recession in simpler terms?

A recession indicates an economic decline during which trade and industrial activity are reduced for a while. Technically, if GDP has fallen in two successive quarters, the economy is classified as going into a “technical recession”.

Should I invest during the recession?

Yes! It’s a good time to buy the dips. During a recession, stock values often decline, which also means that it’s a right time to purchase the stocks at favourable prices. To avoid your emotion being controlled by the market sentiment to make any bad move, it’s advisable to take the dollar-cost averaging (DCA) investment strategy that aims to invest in stocks or funds at regular intervals to spread out purchases.