Recession, and how do we Measure it?

  • Mar 24, 2020 AEDT
  • Team Kalkine
Recession, and how do we Measure it?

According to many economists around the globe, recession is considered as two straight quarters of decline in real economic activity. But this definition looks good in textbooks only and is of little use if we start experiencing a downfall in economic activity. By then, it will not matter if the schoolbooks tell you it’s a recession.

So, what would a real recession look like in Australia?

Well at the beginning, everything would look normal. There would be hints of declining economy, but you would be fine at that time. You will think it as a temporary glitch in the market and will keep ensuring yourself that the recovery is around the corner.  Until one day, you meet your neighbour and he tell you that he has just been fired, and his company is downsizing its employees.

The news would scare you and, you will start making slight adjustments to your buying behaviour. All the foreign trips that you have been planning now will seem a little out of budget. The Netflix subscription that was due in few days-you don’t need it anyways. After all, you have been procrastinating too much watching Breaking Bad. Now you will make a call to your financial advisor who was advising you to keep an alternative fund.

These little cuts that you are doing in your lifestyle is now directly or indirectly affecting the demand curve. This is how butterfly effect works. By affecting the demand curve, you are also influencing the supply curve mainly because they both are inter-related. That foreign trip that you cancelled days earlier, has resulted in an airline cutting their staff’s salary. A plunge in demand is providing way to a plunge in supply and this tough cycle raises alarm bells for any officer, who is trying to resist the trend.

However, the government will not admit now, because it will accentuate the crisis.

People will lose all hope, if the economic engines runs out of trust. This will only highlight the crisis. The government will try to do everything they can to increase the economy, even though they are cash strapped.

Recessions could be triggered by an agitated economy, in which demand surpasses supply, increasing past full employment and the highest capacity of the country’s resources. Overheating can be maintained briefly, but ultimately expenditure will fall down in order for supply to pick up to demand.

Recessions are not only triggered by overheating. They can likewise be caused by unexpected, negative, external events, which many economists describe to as "shocks" to the market that disturb the growth. Shocks can possibly occur at any time in the expansion, but a lengthier expansion offers more chances for shocks.

 

 

Recessions are rare but expensive

Over the time period of 1960 to 2007, the world faced 122 recessions in 21 economies. This appears to be a lot more, but recessions do not happen usually. Each recession has distinctive features and frequently display several common characteristics:

  • They typically last about a year and often result in a significant output cost;
  • A recession is usually associated with a decline of 2 percent in GDP;
  • The fall in consumption is often small, but both industrial production and investment register much larger declines than that in GDP;
  • They typically overlap with drops in international trade as exports and, especially, imports fall sharply during periods of slowdown;
  • The unemployment rate almost always jumps, and inflation falls slightly because overall demand for goods and services is curtailed.

 

How to Indicate and Predict a Global Recession?

Well there is no single method of forecasting a global recession. Apart from looking at two consecutive declines in GDP, the economist looks into various other indicators to determine whether the recession isalready taking place or beginning to. There are two types of indicators that are essential to look at: First is, leading indicators and the second one is lagging indicators.

Leading indicators are ISM Purchasing Manager Index, the OECD Composite Leading Indicators and the Conference Board Leading Economic Index. These leading indicators are important, as they can give advance warning to business decision makers and investors. There are many other data series published by government like housing data and capital goods new orders, which can be also used as indictors of recession.

The second one,lagging indicators like unemployment ratecan be utilised to substantiate an economy’s move into the recession phase.

Reasons for Recession

There are many theories that tries to explain how and why the economy might fall off its long-term rising trend and into the time of recession. These theories can be largely classified as built on financial factors, actual economic factors or psychological factors, with some hypotheses that connect the gaps among them.

Many economists think that structural shifts and real changes in industries best describe how and when how economic recessions can occur. For example, a sudden, prolonged decline in oil prices due to a geopolitical tension could instantaneously decrease revenue across many industries triggering a widespread recession.

What is expected from the Policymakers in the Recession?

The policymakers must be very efficient to utilise any tool at its reach, to end the recession, as quickly as possible without considering when and why the next recession hits. It is their duty to pin down the economy with the support of full employment.

To be efficient, these measuresrequire to increaseexpenditure by businesses along withhouseholds,or governments to reduce the total demand deficit, which is the basicreasonbehind the recessions. The conventionalpoint of viewon mainstream macroeconomics before the Great Recession, which took place between 2007-2009 period, was that economic policy would be enough to stop recessions rapidly and that flexible financial stabilisation would be pointless or could prove to be utterdetrimental. This traditionalprudencemust be one of the most apparent policy casualties of the Great Recession, which took place more than a decade ago, and almost all macroeconomic policy analysts would concur that discretionary fiscal policy should take part in battling the next recession and prompt a swifterrevival.

If the rates increase rapidly, it will affect the total demand growth very negatively. But the vice versa does not happen normally. Lowering interest rates to increase growth in this long-recognised asymmetrical relationship, is compared to “pushing on a string.”

Bottomline

With the coronavirus outbreak, engulfing the whole world presently, many countries have decided to impose lockdown, bringing the financial markets to a standstill. As per International Monetary Fund, the COVID-19 pandemic can be the major reason behind the global recession this year. We can only hope that the world recovers from the impact of the coronavirus soon, and brings it under control, so that no further damages are caused ahead.


Disclaimer
This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice. 

 

All pictures are copyright to their respective owner(s).Kalkinemedia.com does not claim ownership of any of the pictures displayed on this website unless stated otherwise. Some of the images used on this website are taken from the web and are believed to be in public domain. We have used reasonable efforts to accredit the source (public domain/CC0 status) to where it was found and indicated it below the image.

 

There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.

As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.

CLICK HERE FOR YOUR FREE REPORT!
   
x
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK