What actually is a recession, and does it warrant the inherent doom and gloom that’s associated with the term?

Naturally, there’s a lot of uncertainty at the moment, and it’s got us all feeling a bit anxious about the future – Our health, our jobs, our safety and security.

I’m sure by now you’ve heard the word ‘recession’ floating around – In fact, New Zealand is now ‘officially’ experiencing it’s first recession in a decade.

It’s a concerning word for many of us, but what does it actually mean?

It may be the first time in your working life that you’re experiencing this situation, or you may have worked through previous recessions. The last time New Zealand experienced a recession was in 2008 – Also known as the Global Financial Crisis.

Let’s start with the basics:

What is a Recession –

When there’s a significant decline in economic activity as people and businesses spend less money.

Many economists define a recession as ‘two consecutive quarters of decline in GDP”. In other words, we’re going backwards, for two quarters in a row.  

What is Gross Domestic Product –

GDP is essentially a look at the output of a country’s entire economy during a period of time, not just one industry. 

New Zealand’s GDP was roughly $208 billion in 2019 – That’s the value of goods & services we produced as a country. To put that in perspective, the United States GDP was 21.4 trillion.

Experiencing a recession doesn’t necessarily mean shit’s hit the fan, it just means things have slowed down.

What’s the difference between a recession, and a depression –

• Recessions are economic declines that last for at least 6 months (and have happened more often throughout history)
• Depressions are less frequent, more severe, typically last several years, and have deeper impacts on society (the last big one was ‘The Great Depression’ from 1929-1941). The good news is, we have a better handle on regulating the economy than what they did back then. We have more tools and data available to stimulate the economy today.

The History of Recessions –

The world has experienced 4 global recessions over the past seven decades (1975, 1982, 1991 and 2009) – Ranging from 6 months to 3.5 years long (the average time is around 11 months). Some countries have experienced recessions more frequently, (e.g. Greece), while others have experienced them less often (e.g. Australia has not had a recession since 1991).

Here is a link to a good blog which discusses a bit more about the history of recessions and whether they're inevitable.

How does a recession impact society –

It primarily means people are less likely to want to spend money because they have lost confidence in the future. This in some cases can be a ‘self-fulfilling prophecy’ – Because if everyone believes a recession is near and tightens up their spending, this could in itself fuel the next down-turn. (Obviously in the situation we’re all facing today, the primary reason we’re facing a recession is due to Covid-19, and the huge disruption it has caused to global supply chains, businesses and individuals all over the world.)

When people don’t want to spend money (or when spending habits are interrupted), things tighten up - businesses close down, jobs are lost, incomes drop – and this causes a ripple effect throughout society.

Some people will be impacted more than others, and that comes down to the industry you work in, your assets (e.g. Cash savings, house) versus debts (e.g. credit card, payday loans, mortgage), and how quickly the economy bounces back.

Are there any positives? -

Some professionals argue that recessions can help keep economic growth balanced. E.g. by ensuring inflation levels don’t rise too quickly. If everyone earns more, they spend more, and prices then go up - Also known as a ‘Wage-Price Spiral’.

Economic hardship can also help reset some of the bad habits we’ve become accustomed to. As we stop trying to live above our means, we are forced to live within the income we have available. This can sometimes result in people saving more money.

The bottom line is, people are feeling significant health and economic effects of Covid-19, with business forced to close, and people losing their jobs – It’s an extremely tough time for many people across the world.

My hope is that we will get a handle on this situation soon, but in the meantime, a little bit of understanding and Aroha can go along way. You never know what someone else’s situation is right now, so let's all do our best to be kind to one another, and help each other get through this where we can.

For more helpful blogs, visit Ducks in a Row.

References:

https://www.investopedia.com/ask/answers/08/cause-of-recession.asp

https://www.forbes.com/sites/cameronkeng/2018/10/23/recession-is-overdue-by-4-5-years-heres-how-to-prepare/#35c2c4e840d8

https://www.investopedia.com/articles/economics/08/past-recessions.asp

https://www.history.com/news/us-economic-recessions-timeline

https://openknowledge.worldbank.org/handle/10986/33415

https://www.worldbank.org/en/news/press-release/2020/06/08/covid-19-to-plunge-global-economy-into-worst-recession-since-world-war-ii

https://www.bbc.com/news/business-39124272#:~:text=Australia%20has%20not%20had%20a,set%20between%201982%20and%202008.

https://www.investopedia.com/articles/investing/111615/4-countries-recession-and-crisis-2008.asp