What is a Recession?
An economic recession is a marked decline in gross domestic product (GDP) for two or more consecutive quarters. Usually, a recession scenario includes a fall in GDP (inflation-adjusted GDP), household income, inflation, stockmarkets, general investment spending, interest rates and business profits, whereas the unemployment rate and bankruptcies rise.
Effects of Recession
A recession is an inevitable stage of the business cycle, consistent of peak, recession, trough (also known as depression) and expansion. Typically, during the recession period a big share of the consumers will shrink their demand for goods and services, subsequently damaging companies and governments’ accounts. Most businesses escalate to adapt their offer to the market’s needs by shortening their workforce or automating work processes.
That causes a rise in unemployment, which added to the decrease in consumption provokes a decline in tax revenues. Wages and industrial prices gradual increases tend to slow down or even freeze. Governments tend to borrow money to mitigate the negative trend and usually will develop massive plans of public investments. A recession may begin either in a soft or abrupt way; when the latter occurs, it is commonly named a crisis.
After the global financial crisis of 2008, governments from the US and the eurozone applied austerity measures as a condition to contracting more debt. Huge cuts in interest rates and non-standard practices like quantitative easing (QE) were implemented as a shock therapy to stimulate economic activity, as well as a new tendency of maintaining long-term cheap lending to banks.
Opportunities during a Recession
Even though the general economic situation is contracting, during the recession stage there are multiple strategies to make profitable investments, such as short selling stocks (taking advantage of falling markets), the “buying season” (picking up high/quality companies that are selling for cheap) and buy-and-hold (long-term strategy that practices dollar-cost averaging the same way as in a good scenario).
Category: Financial Glossary