Avoiding an economic downturn and its consequences for society is beyond your control. But there are ways to reduce the impacts of a crisis on your pocket and your investments.
As much as we’ve been through a few times in the history of Pak, many people don’t understand exactly what an economic recession means . Is it your case? The truth is that although the term seems complex, the concept is simple and needs to be understood by everyone, since a situation like this impacts the general population.
In this article, we are going to talk more about the economic recession, going beyond the explanation of the concept, and showing what are the practical consequences of the situation for your pocket and for your investments . And, of course, we’ll give you some tips to minimize these impacts and prevent losses in the event of an economic crisis.
What is economic recession?
Economic recession is when the main indicators of a country’s economy retract for a short or long period. It is the exact opposite of economic growth and indicates that the nation, economically speaking, is not prospering.
Although many indicators are involved in this situation, the main one is the Gross Domestic Product (GDP) which says a lot about the economic growth of a country. If the GDP falls in two consecutive quarters, we say that the country is experiencing an economic recession.
Unemployment rate, family income, industrial activity index and investment levels are also indicators directly involved in this situation. Changes in these indices are the most immediate consequences of an economic recession.
It is worth mentioning that the shrinkage of the GDP may be a consequence of the contraction of a specific sector of the economy, while the other sectors remain stable. For the situation to be characterized as a recession, in fact, the economy needs to be contracting more generally.
What are the causes of economic recession?
But what exactly causes an economic recession? Government mismanagement? Political instability? Health or environmental crisis? War? Increased inflation? Implementation of certain monetary policies?
The truth is that there is no exact answer to this question and all these factors mentioned above can be causes of a period of economic recession. The most recent example we have of this is the Covid-19 pandemic, which caused the world economy to contract, due to the need to stop various economic activities.
It is worth noting that the causes of a country’s economic recession are not always concentrated exclusively within that country . As the US dollar is the main currency for economic activities worldwide, a crisis in the United States, for example, tends to be reflected in several other markets. This is exactly what happened in the economic crisis of 2008, which, in different proportions, affected the whole world.
Understand the consequences of the economic recession on society
And when we talk about an economic crisis that affects the country, what are we talking about, exactly? The most immediate consequence of a recession is the generalized reduction of economic activity , which, in turn, leads to a reduction in the supply of jobs and the consumption capacity of families.
The country’s inflation can also be impacted by an economic recession. With families consuming less, the rate may decrease. But isn’t reducing inflation a good thing? In fact, it’s not quite there! Controlled inflation is a sign of the health of a country’s economy and is usually a big plus for investors.
Investments, by the way, represent one more factor that suffers the consequences of an economic recession. A market that goes through a situation of negative instability tends to face more economic volatility and see its investments suffer more frequent and unexpected fluctuations. Want to understand more about it?
How the economic downturn impacts your investments
When it comes to investment, economic recession is synonymous with instability . The market is more risky, with stocks fluctuating unusually and investors having less predictability about their earnings.
Another important point concerns the cost reduction adopted by some companies in the face of the economic crisis. With low production, results tend to drop and the drop is automatically reflected in the company’s stock price .
In addition, the investment market, in general, tends to be more pessimistic in the face of an economic recession and this can change the dynamics among investors. There may, for example, be a greater preference for investments with shorter redemption terms and a trend towards increased interest in fixed income investments — especially if interest rate growth is involved in the crisis scenario.
The fact is that, in situations like this, it becomes even more essential to think in the long term , since no one is able to guarantee when the crisis will pass and everyone needs to be prepared in case it lasts longer than expected.