SMS194 – Recessions… This One Will Be Different

If recessions occur every 10 years then every time one happens you are experiencing it for the first time. This is because the cause of every recession will be different and because you will be affected differently each time depending on the phase of life that you are in each time.

Recession defined – a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. 

The longer we go without a recession the worse the recession seems when it finally does hit because there are more individuals who have never been through one. The individuals who have never experienced a recession do not fully understand or know that the current environment is only temporary, not the new normal, and that things will bounce back. The underlying problem here is that the longer we go without a recession, when one finally does arrive there are more people who can influence the economy, through reacting irrational causing more problems economically in society (ex. selling their homes).

Generally, economic recessions don’t last as long as expansions do. Since 1900, the average recession has lasted  15 months,  while the average expansion has lasted  48 months. The Great Recession of 2008 and 2009, which lasted for 18 months, was the longest period of economic decline since World War II. 

In most countries,  the recovery from the Great Depression  began in 1933. It did not return to 1929 GDP for over a decade. Some say that WWII is what led to the recovery as there was a demand for workers to support the war effort. 

Common triggers of recessions – most recessions are  caused  by a complex combination of factors, including high interest rates, low consumer confidence, and stagnant wages or reduced real income in the labor market. Other examples of  recession  causes include bank runs and asset bubbles.

Causes of a Recession: Demand vs. Supply

A demand-side shock could occur due to several factors, such as:

  1. A financial crisis. If banks have a shortage of liquidity, they reduce lending and this reduces investment
  2. A rise in interest rates  – increases the cost of borrowing and reduces demand
  3. Fall in asset prices  – negative wealth effect leads to less spending 
  4. Fall in real wages – e.g. inflation outstripping nominal wage increases
  5. Fall in consumer/business confidence 
  6. Fiscal austerity  – when government cuts spending
  7. Trade war  –global economic downturn

Recessions can also be caused by the supply side:

  1. Supply-side shock – e.g. rise in oil prices cause inflation and lower spending power
  2. Black swan event  – this is an unexpected event that is very hard to predict. For example, COVID-19 which disrupts travel, supply chains and normal business activity; a pandemic affects both supply and demand. 

Every recession is different, and it happens for a different reason. If the cause and timing of recessions were always the same we would have set up the appropriate safeguards and, we would see it coming and therefore it would not have the impact that it usually does. 

While every recession is different and we are affected differently, there are three elements that are affected during every recession:

  1. Employment  
  2. Debt 
  3. Investments 

Recessions Throughout Our Lives
Taking these elements into consideration, let’s now look at how recessions affect us in every phase of our lives:

15 Years Old

If a recession happens when you are 15 years old you might not even know it happened if both your parents were able to maintain full employment. If one of your parents suffered job loss you may have had mild exposure that to know a recession was taking place. If your family was hit especially hard your experience may have been as dramatic as losing your home and needing the support of a local food bank to survive. As a 15 year old your experience would be focused on dealing with the hardship but not figuring out a solution to your economic situation.  

25 Years Old 

  • Unstable employment 
  • You don’t own much – nothing to really lose 
  • 12 month lease on an apartment 
  • Financed car 
  • No dependants 
  • Can rely somewhat on your parents for support 

35 Years Old 

  • More stable employment 
  • You have things to lose 
  • House 
  • Car 
  • You have dependants 
  • If you have a spouse and you both don’t lose jobs 

45 Years Old 

  • Very employable 
  • Most expensive child raising years 
  • Lots of debt 
  • House 
  • Cars 
  • You have dependants 

55 Year Old 

  • Less stable employment – you are an expensive employee 
  • Less employable 
  • Kids in college – expensive 
  • Hopefully less debt maybe no debt 

65 Years Old 

  • Employment is not an issue 
  • No debt 
  • No dependants 
  • Very concerned with investment returns 
  • Very concerned about real estate 
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