The global economy is teetering on a cliff’s edge, as market indicators are flashing warning signals that we are heading toward a recession sooner than expected. An updated report by Ned Davis reveals some sobering historical context, showing that a global recession is 98% likely. The harsh reality is that every single person will suffer from the effects of a recession, and you can already feel the inflationary pressure as interest rates and consumer prices rise globally. Here’s what a recession means for your wallet and what you can do to prepare!
There’s no doubt that 2022 has been a tough year for investors, in the wake of falling stock prices and a volatile crypto market. Despite these fears, many economists believe we are not yet at the bottom of it and that a recession may shortly begin, impacting almost everyone on this planet.
Before we get into depth, let’s review the basics.
What is a Recession?
Simply put, recessions are periods of significant declines in the level of economic activity that last for many months or even years in some cases.
A recession occurs when a nation’s economy experiences negative gross domestic product (GDP), rising unemployment, declining retail sales, and declining income and manufacturing for an extended period of time. When the economy is in a recession, people lose their jobs, companies make fewer sales, and the country’s economic output drops significantly.
Recessions are considered to be an inevitable part of the business cycle-or the regular oscillations of an economy’s expansion and contraction.
Typical factors that trigger a Recession
A recession can be triggered by a variety of factors, most notably an economic shock and an uncontrolled rise in inflation. The following phenomena are some of the main causes of recessions:
- A sudden economic shock: Economic shocks are sudden problems that cause serious financial damage. The term “economic shock” refers to changes in fundamental macroeconomic variables or their relationships that significantly affect macroeconomic performance. The outbreak of Covid, which shut down economies worldwide, and the Ukrainian-Russian war that affected global energy markets, are more recent examples of a sudden economic shock.
- Excessive debt: If a company or individual takes on too much debt, they will have difficulty paying their bills due to the cost of servicing it. As a result, defaults and bankruptcies increase, causing the economy to capsize. In the mid-aughts, the housing bubble that caused the Great Recession was a prime example of excessive debt.
- Asset bubbles: Investing decisions driven by emotion often result in bad economic outcomes. Strong economies can lead investors to become overly optimistic. In the late 1990s, Alan Greenspan noted that stock market gains during this period were driven by irrational exuberance. Bubbles form in the stock market or real estate when exuberance inflates them. When the bubbles pop, panic selling causes the market to crash, causing a recession.
- Too much inflation: An inflationary trend is a steady increase in prices over time. Although inflation isn’t necessarily a bad thing, excessive inflation can be dangerous. High interest rates lead to a decline in economic activity, and central banks control inflation by raising interest rates. U.S. inflation was out of control during the 1970s. As a result of the Federal Reserve’s rapid interest rate increases, the economy entered a recession.
- Too much deflation: Deflation can cause a recession even worse than runaway inflation. Inflation occurs when prices decline over time, resulting in wages contracting, further reducing prices. Deflationary feedback loops lead people and businesses to stop spending, which undermines the economy. Deflation is caused by underlying problems that central banks and economists cannot fix. A severe recession occurred in Japan during the 1990s due to deflation.
- Technological change: While technological breakthroughs are usually known to increase productivity and boost the economy in the long run, they can also have short-term effects. Technology improved labor-saving practices in the 19th century. Rupture and hard times followed the Industrial Revolution, which rendered entire professions obsolete. Many economists are concerned that AI and robots will cause recessions by eliminating whole job categories.
Every recession has its own causes and effects. Growing economies are more likely to go into recession due to their constant cycle of highs and lows, similar to waves in the ocean. The longer an economic recession lasts, the harder it is to reverse its effects, such as lower consumption, lower investment, and fewer goods and services. In addition, it can also raise the odds of an economic depression, the next rough patch.
Are We Heading for a Global Recession in 2023?
Despite the fact that this economic cycle has not been called an official recession just yet, economists believe that we need to prepare for the possibility of a recession, even before it takes place.
As the world’s three main economic powerhouses – the U.S., China, and the major European economies – stall, the World Economic Outlook 2022 reflects the significant consequences that can arise.
The world may soon be teetering on the edge of a global recession – IMF economist
IMF Economic Counsellor and Director of Research Pierre-Olivier Gourinchas said the outlook has darkened significantly since April. After only two years since the last international recession, there are signs that the world is once again on the brink of another one.
According to economists, the probability of a recession in the next 12 months is 63%, up from 49% in July. The survey pegged the probability above 50% for the first time since July 2020, when the last recession ended.
Even though a global recession is predicted for 2023, it’s impossible to predict how severe it will be or how long it will last. Although not every recession is as painful as the Great Recession of 2007-09, every recession is, of course, painful in its own way.
Who Declares A Recession?
The NBER (National Bureau of Economic Research) is the most reliable national source for measuring the phases of the business cycle at a given time. The bureau describes a recession as “an economic downturn that lasts more than six months and is widespread throughout the economy”.
NBER does not officially declare a recession until it has come to an end. The reason for this is that the data must be analyzed, and the data must be accepted by a committee of experts confirming that the data indicates a recession.
The NBER collects the following monthly statistics. You can tell if an economy is in a recession by watching these key economic data:
- Real income: This is an indicator of personal income, calculated after factoring in inflation. A decline in real income leads to a decrease in consumer spending and demand.
- Employment: The rate of unemployment and the real income together tell the examining committee about the overall health of the economy as a whole.
- Manufacturing: The Industrial Production Report is used by the examining committee to assess the health of the manufacturing sector.
- Retail sales, adjusted for inflation: This is a measure that shows the examining committee how firms are responding to consumer demand for goods and services.
- Real Gross Domestic Product: The NBER also examines monthly estimates of GDP provided by economists like macroeconomic advisers.
Recessions usually begin with the loss of manufacturing jobs. A large order is usually placed months before the end of the month by manufacturers, which can be seen in the durable goods order report. If that declines, factory employment will decline as well. When manufacturers stop hiring, the economy as a whole slows down.
Slowing growth is usually caused by a decline in consumer demand. In the event of a decline in sales, businesses cease to expand. The company stops hiring new employees shortly thereafter. By then, the recession has already begun.
How Does a Recession Affect Your Life?
Recessions are more than just economic slowdowns, volatile financial markets, and bad economic statistics. As one can see, behind the numbers and jargon there are real people – and their livelihoods will also be affected as a result of this.
Considering the economy as an ecosystem is a good way to think about it. Businesses, financial institutions, and individuals make decisions that ripple throughout the entire financial system. Market volatility is caused by recession-fearing investors, which limits the cash flow of publicly traded companies. Companies will be forced to cut costs to stay afloat as fewer consumers will limit their spending. Unemployment may lead consumers to tighten their belts even further, worsening the situation.
Even though it may seem like a game of chicken or egg to determine which comes first, the result is often more important than the cause to a lot of people in the workforce.
Amazon founder, and executive chairman Jeff Bezos, is sounding the alarm!
“If you're an individual considering purchasing a big-screen TV, you might want to wait, hold onto your money, and see what transpires,” the billionaire recommends. “The same is true with a new automobile, refrigerator, or whatever else. Just remove some risk from the equation.”
In an interview with CNN, Bezos says that “the economy does not look good right now. Things are slowing down. You’re seeing layoffs in many many sectors of the economy.”
That means that you might need to tighten up your budget if you do not want to go overboard.
Here’s how a recession impacts your life in the most drastic ways.
1. Recessions disrupt the labor market the most
Downturns often force businesses into survival mode. When faced with a slowing economy, companies may choose to cut costs rather than expand. The economy might grow again soon, but they may delay investments or sidelines new projects that seemed smart when it was still growing. At worst, they might have to slash departments or shed workers – and perhaps even shut down. Many top tech companies have already started firing employees, including Meta, Twitter, Alphabet, Amazon, Cisco, and IBM, among many others.
In this regard, you are more likely to lose your current job, and you will also find it harder to find another job due to the high unemployment rate. Those who remain in their jobs might see their pay and benefits cut, and it may be difficult to negotiate pay raises in the future.
Source: Bureau of Labor Statistics via FRED
Joblessness has increased during every recession. The type of downturn will determine how many employees are laid off. In the wake of the Coronavirus pandemic, joblessness spiked to 14.7%, the highest level since the Great Depression.
2. Recessions make everything more expensive
As inflation rises, interest rate hikes are often used to slow down the economy. The prices of everything around us have increased in 2022, and people are spending more on essentials (rent, electricity, food) than ever before. The rising price of goods and services, combined with inflation, makes it harder to maintain the same standard of living.
As your purchasing power decreases during a recession, you’ll have a hard time-saving money. The loss of savings means that people can’t spend on travel and other luxuries. It’s also likely that you’ll have to make some sacrifices, as fuel prices and food costs will make you think twice before spending.
3. The well-being of the family will be disrupted
The stress of not being able to find work, as well as the loss of income, can damage inter-family relationships in a way that can take years to heal. Family members or friends may be forced to borrow money from families, which can make things uncomfortable.
Families sometimes have to change their plans, sell their homes, switch schools, and cancel vacations because of unforeseen circumstances. The reduction in income leads to a reduction in the amount spent on entertainment, dining, and extracurricular activities.
Many families are forced to make drastic changes to their pre-recession lifestyles as a result of a recession in which people cut budgets on extras. Consequently, there will be lesser trips, fewer shared experiences, and fewer opportunities to make the most of life because of limited funds.
4. The rate of wealth accumulation will decline
When the economy is in recession, the stock market often enters a “bear market,” which is characterized by stock prices dropping by at least 20 percent. According to a Bankrate analysis of Yardeni Research data, the average S&P 500 bear market since 1929 resulted in a 37 percent decline in valuations.
Recessions can also cause bonds, real estate, and other investments to lose money, reducing your savings and interrupting your retirement plans. You may even lose your home and other property if you are unable to pay your bills due to job loss.
Here’s how Forex trading can help you hedge against inflation in times of recession
5. Loan approvals will likely be tightened
Most financial institutions are more cautious about lending money out – either to save money or to avoid the ultimate risk of a business or individual not being able to repay them.
In the wake of the Coronavirus pandemic, banks like Chase, Wells Fargo, and Citigroup, for example, ceased accepting new applications for home equity lines of credit, putting consumers in the same position that they would be in during a downturn. As a result of the financial crisis, some cardholders have had their credit card limits reduced by their credit card companies.
Those decisions can have an adverse effect on the ability of businesses and consumers to find funding readily.
Opinions on the recession in 2023
As the world continues to struggle with the effects of an economic recession, 2023 is shaping up to be a year full of changes and hardships. Many experts predict that unemployment rates will continue to rise, while consumer spending and confidence in the global economy will plummet.
In particular, experts are concerned about how the sharp decrease in oil prices will affect the global economy. Some economists fear that it will cause a huge decline in investment and consumer spending, as people try to save money on purchases like gasoline and travel. Others argue that this decrease will lead to an increase in employment, as consumers spend more at local businesses rather than traveling long distances for shopping or entertainment.
Whatever happens, going forward, it is clear that 2023 will be a difficult year for many people around the world. Experts are deeply concerned about the impact of the economic recession on countries with declining GDP in 2023, including Japan, Greece, Brazil, Italy, Spain, France, Ireland, Germany and Portugal. Many fear that rising unemployment rates will cause a serious decline in consumer spending and confidence in these countries, while others argue that the drop in oil prices will lead to increased investment and consumer spending.
Regardless of how things ultimately play out, it is clear that these countries will face many challenges over the coming year. However, with strong leadership and a commitment to resilience and innovation, we can work together to navigate this difficult period and emerge stronger than ever before. Let’s band together and support one another as we navigate the challenges of 2023 and work toward a brighter, more prosperous future for all.
In conclusion, while the future of the global economy remains uncertain, there are still many opportunities to rise up in this challenging time and build a better future for ourselves and our communities.
How to tackle a recession?
It is inevitable that recessions will impact everyone in some way, but that does not mean we need to overreact to the downturn. Getting prepared in advance can help you cope with the worst-case scenario in the event it occurs.
Recession and portfolio diversification
When it comes to managing your investment portfolio during a recession, one of the most important strategies is diversification. This means spreading out your investments across various asset classes, such as stocks and bonds, in order to reduce risk and protect yourself against market volatility.
There are several other factors that can also help you successfully navigate a recession with your portfolio. For example, it is important to monitor the economic landscape carefully and keep a close eye on any changes that may affect your investments. You should also be prepared to make adjustments to your strategy, such as adjusting your risk exposure or rebalancing your portfolio periodically, in order to take advantage of new opportunities that arise during tough times.
The decision to trade forex during a recession is undoubtedly a smart one. As you might know, the forex market is one of the most liquid and largest in the world. The forex market behaves differently in a recession than in other asset classes, which makes it a great place for traders for profit during economic recessions.
Stock prices tend to fall during economic recessions and crises, for example. The forex market, however, is filled with a variety of forex pairs that react differently to the performance of the economy. Economic slowdowns or inflationary pressures will likely cause currency pairs belonging to stronger economies to gain value, whereas currency pairs belonging to weaker economies will likely lose value.
The key to success in foreign currency trading is largely determined by the currencies that investors choose to trade. You can profit from currency rate volatility by investing in the currencies of major currencies, which will provide better protection against exchange rate fluctuations.
Eventually, we can say that there are a few key strategies that can help you effectively navigate the forex market during times of economic distress. First, it’s important to focus on news and events instead of fundamentals. This means paying careful attention to what is happening in your local economy as well as globally, such as any government bailouts or new policies that may be implemented.
Second, it’s crucial to be flexible with your trading strategy. For example, you may need to adjust your stop loss levels or take on higher risks in order to capitalize on market opportunities. Finally, always remember that forex trading is a risky venture and it’s important to keep emotions in check when making decisions about your trades.
With the right strategies and mindset, you’ll be better equipped to take advantage of any opportunities that arise during a recession. Remember to stay calm and focused on your goals, even in tough times, and you will emerge from the economic crisis stronger than ever before!