A summary on History of Recession and its impact on Global Economy from the last century

If you haven’t been living under a rock for the past couple of months you have probably heard some talk about a recession on the way. People left, right and the center is talking about the warning signs that indicate the economy is slowing down. Germany has experienced a fall in its growth rate below zero, President Trump is in a trade war with China, the yield curve was inverted briefly, and the stock market looks pretty shaky.

Last the time when a recession occurred, I was a PG student with NIFT and finding my talented college seniors struggling to get good jobs with companies we aspired to be with. I had no clue about what a recession was then until I completely learned what is a market, market behaviour and how it connects with every household during my various jobs in India and middle east.

Believe it or not, financial recessions are quite common in history, unfortunately. And affected countries are often ripped apart by economic tsunamis as a result of these recessions. Recession it has been the inevitable battle over the last century for mankind.

Here’s a look at the most prominent and devastating financial recessions the world has faced in the last century:

Crash of Wall Street (1929) and Great Depression (1929–1939)

On the 24th of October, 1929, began the stock market crash of 1929, which was a four-day collapse of the stock market. Stock prices fell by 23%, which was considered as the worst decline in the history of the United States. This decline marked the beginning of a 10-year-long worldwide economic recession known as “The Great Depression”.

Between the years of 1929 and 1932, at the apex of the recession, the worldwide gross domestic product (GDP) fell by around 15%. By 1933, the rate of unemployment had risen from 3% to almost 25%. For some countries, the negative effects of this recession were so immense that they were still affected until the beginning of World War II.

Rich and poor cities, especially those dependent on heavy industry, faced the brunt. Construction was almost completely halted in most cities. Cities dependent on mining, logging and other primary sector industries suffered the most.

Early 2000s recession - Dot-com bubble (2000-2002)

The dot-com bubble or internet bubble was the result of a rapid increase in investments in internet-based companies in the early 1990s. With the advent of the Information Age sometime between 1990 and 1997, almost 35% of households in America considered owning a computer a necessity rather than a luxury. In addition to this, the Taxpayer Relief Act of 1997 decreased the tax on capital gains in the US, and this made people more willing to make speculative investments. In 1995 and 1996, companies like Netscape Communications Corporation and Yahoo! had extremely successful IPOs on Nasdaq, and other internet companies like Excite and Lycos also went public. Due to the above factors, investors were willing to invest in almost any dot-com company. Stories of people quitting their jobs to become full-time traders were common.

A lot of dot-com companies spent heavily on promotions and advertising to increase their market share as fast as possible. In January 2000, during SuperBowl XXXIV, there were 16 dot-com commercials and each commercial cost $2 million for a 30-second spot. Equity market values grew exponentially between the years 1995 and 2000 with the technology-driven NASDAQ index increasing from less than 1000 to more than 5000.

The dot-com bubble burst in 2001 and through 2002, with equity market values entering the bear market. The NASDAQ index took a tumble from 5,048.62 on March 10, 2002, to 1,139.90 on October 4, 2002. Several dot-com companies went bust, and trillions of invested dollars disappeared. Even blue-chip stocks like Cisco and Intel lost more than 80% of their stock value.

The dot-com bubble was basically fed by easy capital, cheap money, market overconfidence and speculation. Amazon, Priceline, and eBay were the few companies that famously survived the bubble.

Financial Crisis (2007-2009)

Often compared to the Great Depression of the 1930s, the financial crisis of 2007-2009 occurred despite the preventive efforts of the Federal Reserve and Treasury Department. 2007 marked the beginning of what is considered as “the worst recession since the Great Depression”, with a subprime mortgage crisis in the United States.

In April 2007, New Century, an American REIT, files for bankruptcy protection under Chapter 11. Soon after that, on September 15, 2008, Lehman Brothers, the 4th largest investment bank in the US filed for bankruptcy after 158 years of being operational. This was the largest bankruptcy filing in the history of the US, and global markets plummeted immediately.

Excessive risk-taking by banks like Lehman Brothers magnified the financial tsunami globally. Asian markets including Japan, China, India and Hong-Kong were impacted immediately. The collapse of the housing market too played a major role in the Financial Crisis of 2008. More than 8.2 million jobs were lost since the beginning of the recession in 2007. Male-dominated industries like construction and manufacturing were hit the hardest leading to this being referred to as a ‘mancession’. Almost 628,000 jobs were lost in the financial industry.

The recession that began sometime in December 2007 reached its end by June 2009 as per the US National Bureau of Economic Research (NBER). On January 10th, 2007, President Barack Obama declared the markets as stabilized and informed that most of the money they spent on banks have been recovered.

A Recession is coming

As mentioned earlier, warning bells of a possible recession are going off everywhere, especially in the US. According to Mark Zandi, the chief economist at Moody’s Analytics, the economy is driven by the consumer and as long as they keep spending, the US economy will continue to grow. So far, it’s going pretty well, which is not surprising because unemployment has been below 4% for the past 17 months, and wages are looking strong.

While all of the above sounds good, the global the market situation is taking a turn for the worse. The trade war between the Trump administration and China has slowed down U.S growth, the UK announced a negative growth in GDP for the past quarter, China’s industrial production is at its lowest in 17 years and Germany has announced a shrinking GDP with its 10-year bond hitting a negative 0.62% yield.

But the biggest warning sign is the inversion of the 2-year/10-year Treasury yield curve because every recession that took place in the last 45 years was preceded by the inversion of a yield curve.

Since the end of the last recession in 2009, stock prices of tech giants have soared with Apple up by almost 900%, Amazon up by almost 2000% and even smaller companies like Netflix up by almost 5000%. Twitter and Uber also have achieved over $100 billion since their IPO. 

But, if there’s anything you learn from the Dot-Com Bubble or the Great Recession, it’s that things can change quickly and drastically. A downturn can lead to bankruptcies, restructuring and executive departures.

Conclusion

Recession is known to separate the strong from the weak and tests the strength of investors and business leaders who drive the business. Getting through a recession may be tough, but those who get to the other side face less competition and can take advantage of the next boom.

Like the very popular dialogue from our very own Indian Super Star Rajinikanth, our so-called “Thalaiva”, Recession is like “No one knows when or how I will arrive, but I will arrive when I ought to”; adding here, Recession becomes more like “I come when you least expect me or doesn’t care if you are not prepared”.

Indeed i think we (Both - Business & Individuals) should be prepared.