Is there a real danger of a recession?
We hear more and more about the notion of an economic recession, an almost inevitable crisis that is already hitting us with the help of prevailing inflation. But what exactly is a recession? Is this phenomenon really threatening us? Let's find out together with AFORTI Exchange.
What is a recession?
The most popular explanation of a recession is a slowdown in economic growth, leading to, among other things, a reduction in the value of services, goods, wages, an increase in unemployment and, above all, a fall in gross domestic product (GDP).
Recession is also associated with corporate bankruptcy and a reduction in the value of assets such as shares and real estate. It is worth noting that for a recession to occur, real GDP must decline for two consecutive quarters of a year or years. In simplest terms, it is a period of stagnation in the economy, which is a permanent feature of the economic cycle. Recessions occur regularly once in a while, but unfortunately no one knows when exactly it will happen and how deep it will be.
Historically speaking, we have already struggled through several recessions since the early 2000s:
- 2000/2002 - this is the so-called 'dot-com bubble', at that time the crisis consisted of an overvaluation of companies in the IT market. At the time of the crisis, the capitalization of companies fell dramatically.
- 2008/2009 - it was the inflated real estate market and the huge demand in this sector, which was unfortunately linked to too fast mortgage lending without financial security.
- 2020 was the last recorded economic recession due to a stalled economy. The situation was short-lived thanks to the quick decision to massively add money.
Causes and effects of recession
There can be many reasons for an economic slump, as every recession is different. However, among the most common are: bad monetary policy, too much government interference in state finances, and armed conflict. Economists cite the war in Ukraine and the turbulence in the markets caused by the conflict, as well as the earlier pandemic, as the main reason for the current crisis.
In the course of the recession, a decline in the quality of life is to be expected, which has already been significantly influenced by inflation and the subsequent rise in interest rates. Symptoms of the crisis also include a significant drop in interest in the property market and an unfavourable investor sentiment, taking a much more cautious approach to investment.
What will make the next recession different?
To repeat, every recession is different, and we never know the exact date when it will occur. Today, we are seeing massive global money printing, which has enabled many businesses to be supported. Today, however, we are feeling the effects of the increase in banknotes. In addition to this, the unstable geopolitical situation of the world plays a large role.
In previous years, the support for citizens was the reduction of interest rates, so that there was free capital and a willingness to invest money. It is difficult to revive the economy in the same way as before, when at the same time we are struggling with inflation.
Today, on the other hand, the opposite policy is being pursued, resulting in higher interest rates to take some money out of the market and bring the situation under control.
What can we do?
We should remember that we are constantly taking part in a recurring market cycle, unfortunately often without knowing which stage of it we are in. At times when we see significant economic growth we buy at an exponential rate, in turn, when the value of the market falls too much we sell, which leads to crises. Emotions are intrinsic to human beings, and we are particularly driven by them in stressful situations. It is especially fear that encourages us to sell off shares, real estate etc. en masse, causing the value of these markets to fall.
To properly prepare for a recession, it is important to have a basic understanding of market fluctuations and patterns. It is through this that when a downturn occurs, and we see a massive sell-off of assets, real estate and other things of value, we will be ready to take advantage of opportunities. Buying a property at an attractive price during a downturn will help to improve the market, and when the situation normalizes, the investment will bear its fruit, surpassing the value for which the property was purchased.
However, it is important to bear in mind that a recession that causes a lot of emotion is not a good time to sell due to helplessness and fear. This action will only understate the value of the property you own.
The knowledge to take from the topic of recession is first and foremost:
- Remaining calm and not being driven by emotions and fear.
- Considering hedging by diversifying your currency portfolio and buying major currencies: USD,GBP, EUR.
- Knowing the basic economic cycles - the economic sun always comes out after a market storm.
- Prepare for a recession by accumulating capital.