Economic downturns can cost millions of people their jobs, retirement savings, and financial stability. Even though the ringgit reached a two-month high since prime minister Anwar Ibrahim came into power, the world economy is stuttering, and many citizens all over the world continue to keep an eye out for a global market recession.
While recessions are an unavoidable element of the business cycle, knowing the warning signs of one could help you prepare. The most important thing to remember during a recession is that things will eventually improve. The economy recovers, customers begin to spend again, and jobs are restored.
Here’s what you need to know about recessions, including a very brief history and where things stand. Check back tomorrow for part two of this article, which will talk about signs and warnings, as well as what you can do to prepare in the event of an economic downturn.
What is a recession?
A recession, in basic terms, is a severe decline in an economy that lasts more than a few months. The technical definition is at least two consecutive quarters of negative economic growth, which is measured by gross domestic product (GDP). Nevertheless, the word “recession” is also frequently used in a broader sense.
A recession typically lasts between six and 18 months. The length of the downturn depends on its severity and the steps taken by the country’s government and central bank (Bank Negara in Malaysia) to handle it, among other things.
While a single incident such as the 2008 financial crisis might cause a recession, economic downturns are a natural component of the business cycle and have various causes. It could occur when a country’s economic activity deteriorates for more than two successive quarters.
In the United States, the National Bureau of Economic Research is in charge of recognising and detailing the start and end dates of recessions.
During a recession, countries see significant disruptions in the economic cycle, such as a decline in sales, an increase in the unemployment rate, and a decrease in economic output.
Here are two examples of recent recessions:
- 1997 Asian financial crisis
The snowballing started with the financial collapse of the Thai baht (also known as the Tom Yum Kung Crisis), leading to a chain reaction that badly affected Southeast Asian nations as well as Japan and South Korea.
In Malaysia, the KLSE dropped by more than 50% and the ringgit devalued by 50%. The construction sector contracted 23.5%, manufacturing shrunk 9%, and the agriculture sector 5.9%. Overall, the country’s gross domestic product plunged 6.2%.
- 2008 Economic Recession
The 2008 financial crisis led to the fall of Lehman Brothers, a significant market participant in the US banking sector. This led to a drop in subprime lending in the country, resulting in decreased bank liquidity.
The growth of loans was exponential for banks and financial firms that extended credit to individuals without performing financial checks. As a result, the frequency of defaults rose, converting the credits into non-performing assets and decreased liquidity.
Is there a risk of a new recession?
There were indications throughout the year that a recession could happen in 2022, though thankfully it hasn’t happened – yet. The Russia-Ukraine conflict caused an increase in interest rates, reducing economic development and foreshadowing a US economic recession, which in turn would have global repercussions.
Since the start of the conflict, the US market has seen inversions in the government bond market. Though economists do not guarantee a recession, this observed inversion has been a prominent component in previous periods of recession.
And this, in turn, suggests a recession could be on the way. Whither 2023?
Excessive credit and debt on risky loans and marginal borrowers can result in a massive buildup of risk in the financial industry. The US central bank, the Federal Reserve, and its banking industry has historically been known to boost the supply of money and credit in the economy to extremes, encouraging dangerous asset price bubbles.
Artificially low borrowing rates in the runup to a recession can affect the interactions between firms and consumers, by making interest-rate-sensitive business projects, investments, and consumption decisions – such as the decision to buy a larger house, or undertake risky long-term business development – appear far more enticing than they should be.
The failure of these decisions to reflect reality as interest rates rise is a major contributor to the wave of business failures that characterises a recession.
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.