Over the past year, “recession” has become almost a buzzword and definitely commonplace. Along with it, terms such as economic downturn, economic stagnation, bear market, market correction, yield curve inversion, debt-to-income ratio, have been at the forefront of the media’s headlines. But the actual meaning? Nowhere to be found. Real-world relations? Much like the meaning, nowhere to be found. These phrases are being thrown around more than a baseball during a game, so let’s dumb it down for a second.
What is a recession?
Explaining a recession is undoubtedly some tricky business because there is no steadfast universal definition. That said, there is a technical one; a recession is a period of economic decline in which a country’s GDP (gross domestic product) sees a reduction for two successive quarters.
A recession usually lasts about a year and sees a country’s GDP drop a cumulative 2% during the decline. A recession can last longer and cause a greater decline, which can be a depression, but we’ll stick to recessions for now.
You’re probably thinking, “Cool, now I know what a recession is, but what does it mean for me? Does it have any effect on me or is this something that only affects the country’s reserves?” Fair question. When a country goes into recession, the general population can be quite heavily hit. When a country’s GDP drops; less products are manufactured, created, and produced; so less people are needed in jobs; so there’s less money to be spent; which means less money is used on buying products; further decreasing the need for manufacturing, and the cycle repeats. All this means that average consumers have less money, businesses go bankrupt so they have less money, in turn meaning the country has less money. So to answer the question, yes. Yes a recession does have an effect on you. Now if this scares you, you’re probably wondering “How will I know when a recession is coming?”
Indicators of a Recession
When a recession is about to occur, it doesn’t happen all of a sudden, there are signs which can predict roughly when a recession is imminent. Some rudimentary economic indicators that show signs of a recession (decline in GDP) are a decline of real income, decline in manufacturing, and a decline in retail. However, this can be a slightly narrow point of view in some cases. Another indicator is something you’ve likely heard of, a yield curve. A yield curve is a graph predicting the economic (monetary) yield from the buying of 10-year and 2-year government bonds (lending money to the government). When the predicted yield for a 10-year bond is less than that of a 2-year bond, the yield curve inverts, hence the term, “yield curve inversion”. An inversion is obviously negative as in a period of continued economic growth, the payout after 10 years should be greater than the payout after 2 years, and if it is not, it means the economy will shrink, thus a yield curve is a strong indicator of a recession. In fact, every instance of a yield curve inversion in the past 62 years (7 inversions) has seen a recession shortly after with the exception of two inversions. The curve inverted in August of 2019, so if history is anything to go by, we’ll likely see a recession within the next year.
All that in mind, you’re probably looking to avoid a recession, especially seeing as now you know one may be coming. So are there any ways to avoid a recession? Well yes, but there isn’t much you as an individual can do to stop an economic recession. Avoiding one is more in the hands of a country’s government and international cooperation between governments, so all you can really do is sit tight, save up your own funds, and take steps to ensure the best possible outcome for yourself.
Written by Daksh Mathur, a guest writer for the Junior Economist