Why Are We In A Recession 2020
Behind each thriving economy is a recession following behind it. However, the COVID-19 pandemic has to lead to a global economic downturn, as many industries scramble for practical alternatives.
Although one would think that the pandemic was the only cause, there are a few economic factors that have to be taken into consideration. And in this guide, we’ll discuss those factors and how COVID-19 plays a part in the recession.
What is a Recession?
Before we discuss the current recession of 2020, its good to have a general understanding of how recessions work.
A recession is defined as a "significant decline in economic activity that lasts for a few months." During a recession, you'll notice a reduction in jobs, reduced production, and market changes. If a recession lasts for too long, it can turn to an economic depression. However, some economies can rebound and go back to normal results after a recession.
What Caused the Recession?
While there isn't an official declaration of a recession, the global economy it's heading towards that direction. COVID-19 has caused direct damage to businesses and disrupted local and global supply chains. Both the fear surrounding the epidemic and its impact are important in determining why this recession started.
However, the underlying cause of the recession is due to fragile business models, overinvestment in marginal business, razor-thin inventories, supply chain overextension, and the low-interest rates of centralized banks everywhere, and the Federal Reserve, since the previous recession.
The distortions in consumer behavior and business investments were so addicted to the endless supply of money that it laid the groundwork for economic devastation in 2020. This economic devastation has resulted in a global economy that has zero-margin of resilience against negative economic shocks.
Leading economic indicators of a recession were evident in 2018 and 2019. This occurred when shortages of employees and the labor market have come to an end and caused the federal government to slow credit and monetary expansion.
The recession started when specific economic indicators such as yield curves, began to show signs of a recession. A serious as the COVID-19 outbreak and the lockdown measures that ensued, this economic recession was years in the making. The economy was already on its way to a recession, COVID-19 was what accelerated it.
Recession vs. Depression
A depression is a longer form of a recession. A recession occurs if an economic downturn lasts for two quarters. A depression can last for years until the economy resets itself.
For instance, The Great Depression lasted from 1929 to 1939, and the unemployment rate reached a peak of 25.995. In October 2009, the unemployment rate increase to 10.8%, causing a short term recession.
How Does the Recession Affect Me?
A recession puts a halt to a growing economy. Recessions lead to an increased unemployment rate and reduce GDP. As the unemployment rate increases, the consumer's purchasing power is decreased. In fact, some businesses can become bankrupt.
In recessions, many people lose homes because they’re unable to pay their mortgage payments. Younger people are unable to obtain a job after school. With recessions, the volatility of businesses can throw off an entire career. Here are some factors that can affect a recession:
Wholesale Resale Sales
Wholesale-resale sales and manufacturing adjusted for inflation tell economic commissioners how well the consumers respond to demand.
Warning Signals
During an economic recession, a quarter of negative economic growth will occur. Then it's followed by growth for a few months and then reverts back to the recession.
Monthly GDP Estimates
The NBER will look at the monthly GDP estimates. Remember that the stock market isn't a direct indicator of a recession. Stock Prices show the expected earnings of public companies. Investors' expectations can be either too pessimistic or too optimistic. As a result, this makes the stock market has more volatility than the economy.
When a market enters a recession, chances are the stock market can turn to a bear market. A bear market is when the stock market decreases in value by at least 20%. Stock market crashes can also lead to a recession because the majority of investors lose confidence in the economy.
Employment
Real income and employment will tell commissioners about the overall economic health. Employment can be used to show how well civilians are working in an economy. If the unemployment rate is increasing, chances are the economy is nearing a recession.
Real Income
Real Income is used to measure the personal income that's adjusted for inflation. Welfare payments and Social Security are not included. When the real income is decreased, so makes the demand and consumer purchases.
How Does the Recession Affect me in the Long Term?
The 2020 Coronavirus recession has caused distress to established economies, but what about the developing ones? Emerging economies were already having a difficult time creating economic growth. Due to the outbreak, the challenge of growing these economies became more difficult.
Another economic impact is the sudden drop in oil prices and oil demand. Low oil prices might be able to provide temporary support once restrictions are lifted. The low oil prices allow oil producers to add diversity to their economies. Also, the oil price drop might give more reasons to use energy reforms and deepen them after the health crisis ends.
Policyholders will have to create policies that stimulate economic growth. This includes giving money directly in the form of stimulus checks and supporting the private sector. Countries need to sustain economic activity with support for firms, essential services, and households throughout the mitigation period.
Conclusion
As the world continues to combat Coronavirus, we can expect the recession to continue. The good news is that the recession leads to market adaptation. This means that the global economy will find ways to adapt and create a new economic system that improves upon the previous one. In conclusion, we can remain hopeful during this recession, as the world’s economy has rebounded from them in the past.
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