An economic growth surge is a usual expectation of the population residing in countries that are their own. When the systems are working as it is set and anticipated, every story seems to be a good one. Is there any bad reality or do we know about what’s unseen? We hear a lot that a percentage of the population is below the poverty line and few other talks about people being unemployed, but what is contributing to that fact?
What is a recession?
In a sensical way, “Recession refers to the drop in economic activity of the country” And it is recognized as one of the factors if the GDP growth is negative for two consecutive quarters.
The bang of the recession is on the GDP, retail sales, employment, income, and manufacturing. But it’s been 10 years since the world went into an economic meltdown. Currently, the Russia – Ukraine war might seem like impacting the growth of the economy and that’s the question hovering in all the curious minds. There surely is a dip anticipated as we can see it falling to 7.5% from 8.7% projected on January 2022 in India. The slowdown of the economy alone can’t be the reason to conclude that it as a recession, there are various other things adding to it.
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What causes recession?
Wondered what happened during the Covid catastrophe? Around 225 million people around the globe lost their jobs as a result of employers shutting their businesses down. That’s because the catastrophe forced the situation to shut down processes and it led to the consequences of unemployment.
Only if the GDP falls down by 10% and more, the economy is said to be in a “Depression”. The cause of it can come from financial crises, natural disasters, raging pandemics, trade shocks, and bursts of the economic bubble.
One such example of recession is the “Great Recession” due to the housing market crash in 2008 in America. It was led due to a man-made financial crisis which was a question on unethical rules of the corporate law who lend the mortgage loans such as investment banks, and mortgage investors and also adding to that the “insufficient regulation on the loans offered”. When this event backfired, people began to default on payments.
What’s into this story is that recession, regardless of how it arrives, isn’t in anybody’s hand to control but to be dealt with. Like stock markets rise and fall, even the economy is ought to recorrect over time after the dip though, it may last for months or years depending on the cause of it in the first place.
How does inflation affect the bond price?
Several factors add to the overall decline
1. The rise in interest rates
The rising inflation demands that central banks, curb it by increasing interest rates. It has no option but to do it in order to control the situation of the increased Consumer Price Index. The central bank might also do that to preserve the currency value.
2. Crash in the stock market
When investors lose confidence in investing, the stock market generally crashes and businesses fall into a shortage of money flow. Other financial crises or economic turmoil can pull down the stock value, hence the crash.
3. Dip in manufacturing orders
When the demand slows down, it is an indication of slow processing of the manufacturing as there are not many orders pouring into the system. The demand might have slowed down due to an increase in the prices of the products.
4. Control of wages
When the company wants to reduce the wage of an employee, it is impossible for them to implement it and that leads the company to get into laying off employees. This has been one of the reasons for recessions back in history.
5. Deflation
The falling value of goods and services hits the economy through the psychology of the people. When the prices fall, consumers expect the price to fall more down before purchasing it next time. That indeed reduces the demand for the goods which in turn is a reason for recession. For your information deflation is worse than inflation for that matter.
How is recession actually assessed?
When the recession is underway actually? The sign of a dip in GDP is a signal that makes a way to it. The business cycle dating committee at the National Bureau of Economic Research measures recession on the aspect of “Depth, Diffusion, and Duration”.
But what does it mean?
Depth refers to “The gravity of the severity in the downfall of the economic activities”.
Diffusion refers to “How the downfall has impacted the economy geologically and industry-wise. “
Duration refers to “How long the decline lasts from the verge of it to the recovery stage.”
How does the recession affect an individual?
- Losing your employment and finding a replacement is a tougher hit.
- Investments in any instruments may reap you nothing but loss.
- Sales for the business depreciate and may force them into bankruptcy.
- Tightened regulations from the lenders.
Is the recession at the surge?
The news about the arrival of the recession is hovering around but is it actually coming? For that to be the case, there must be uncertainty in several factors which causes the recession. So far only the yield curve is contributing to that fact and none other.
Business outputs
The dip comes with incurring losses, but the response of the businesses has been positive.
Spending trend
The decline or slowing of consumer spending indicates that the economy is weakening but the spending has been consistently great by the consumers.
Employment drive
More the employment opportunities are carried out, the greater is the productivity of the economy, and the moment it lowers, this dip impacts the GDP. Due to increasing demand by the consumer, employment is sustainable so far.
Yield curve
The yield curve of the US treasuries has an impact on the recession. This is observed to be flattening to slightly inverted at the present and can signify the recession to arrive.
It might not be easy to entirely give a final verdict about the arrival of the recession as the sustainable recovery is still seen in the economies and at this moment predicting how long it may stay might be not viable just based on the slight decline in the GDP and yield curve. But it is always possible to take precautionary measures by having an investment strategy at hand to tackle the economic outbreak at any given point in time.
Time Value of the Money in the Present and Future
At a glance
Currently, due to crises like pandemic outrage and war, the consequences have slowed down the growth of the economy. And it is termed “Stagflation”. This in turn has increased the cost of living in the countries due to rising inflation. For a country to be doing absolutely well, it requires maintaining a GDP of 10% growth year on year.
It was only in 1988 and 2006, India saw a GDP above 10% but it is hard for any economy to maintain a GDP consistently to this level, and a dip due to natural or man-made disasters can always plummet the economy and might warn the sign of recession which always is a concern but needs to be tackled through future visions as it is legit to consider the dips are always meant to be temporary, to expect a recovery as an immediate action after every fall.
Investment Strategies in the Bond Market
