{"id":23108,"date":"2019-06-10T16:33:47","date_gmt":"2019-06-10T13:33:47","guid":{"rendered":"https:\/\/www.bondora.com\/blog\/?p=23108"},"modified":"2019-06-10T16:33:47","modified_gmt":"2019-06-10T13:33:47","slug":"recessions","status":"publish","type":"post","link":"https:\/\/goandgrow.eu\/en\/blog\/recessions\/","title":{"rendered":"Recessions: The next one may come sooner than you think\u2026"},"content":{"rendered":"\n
\"\"<\/figure><\/div>\n\n\n\n

Recession. The word\noften conjures up thoughts of fear and chaos. Recessions don\u2019t only affect the\nglobal and local economy, but also investors, who can lose significant sums of\nmoney during such periods of time. To understand recessions, you must\nunderstand the cyclical nature of markets, previous recessions, and how certain\nfactors play a role in the downward swing of an economy.  <\/p>\n\n\n\n

What is a recession?<\/h2>\n\n\n\n

Contrary to popular\nbelief, economies are not always growing at a steady pace. There are periods of\neconomic expansion and contraction, which ebb and flow constantly. A period of\nextreme economic growth is a welcome sign for businesses and consumers alike,\nwhile a period of economic contraction is cause for concern. <\/p>\n\n\n\n

A technical recession is\ndefined as a period of economic decline when GDP growth falls over two\nsuccessive quarters. Such an economic climate displays signs that the economy\nis on a downswing and businesses are contracting their operations. An actual\nrecession is harder to define, but most economists agree it occurs when there\nis a significant economic decline across an entire economy lasting for more\nthan a few months. While this definition is more abstract, a recession is quite\nevident when it hits an economy, as it affects all aspects of business and\nconsumers lives.<\/p>\n\n\n\n

Causes of recessions<\/h3>\n\n\n\n

There is much to be said\nabout why a recession occurs. Some believe it is in the natural cycle of\nmarkets to fall in and out of recession regularly, while others attribute\nrecessions to specific economic and financial factors that weigh down\neconomies.<\/p>\n\n\n\n

Recessions can be caused\nby the bubble bursting in a specific asset class. When there is significant\ndemand for a specific asset, buyers will come in and drive the price upward. As\nlong as buyers believe the asset will rise in value, its price will continue to\nsoar. Eventually, the asset might lose its value, or investors will realize\nthat the price has been driven up too high, at which point a major sell-off\nwill occur and the value of the asset will quickly drop. <\/p>\n\n\n\n

This is exactly what happened in the 2008 mortgage crisis<\/a>, when the derivatives market underlying home mortgages were thought to be bulletproof, until it was found that a significant number of mortgage holders could not pay their debts due to rising interest rates. This caused massive defaults in home mortgages, and with it, a collapse in the housing and financial markets almost overnight.<\/p>\n\n\n\n

Recession cycles<\/h3>\n\n\n\n

When an economy hits a\nperiod of prolonged expansion, it is not uncommon for inflation to rise. At\nsome point, the economy will have no more room for growth in its current\niteration and hit a peak. As prices rise, demand from consumers will fall,\ncausing businesses to start cutting their production and reducing employment.\nThis cascading effect of higher unemployment and a reduction in consumer demand\nfollowed by business contraction is what ultimately leads to an economic\nrecession. <\/p>\n\n\n\n

\"\"<\/figure><\/div>\n\n\n\n

While business cycles\ncan be predicted to some degree, their duration and magnitude cannot. Over time\na variety of business cycles have brought recessions of varying degrees. The 2001 post-dot-com recession<\/a> was short, lasting only 8-months\nfollowing a quick rise in internet-based businesses. On the flipside, the Great Depression<\/a> in the United States was devastating,\nlasting about 10-years and creating 25% unemployment in the country.<\/p>\n\n\n\n

Based on historical business cycles, markets are long overdue for a recession. On average<\/a>, the global economy is in expansion for just over 3-years in each cycle. Today, the economy has been in economic expansion for over 9 years, a significant period of time given the general business cycle. The latest recession in 2008 is now over a decade ago, meaning, it is not unreasonable to think another recession is waiting in the wings.<\/p>\n\n\n\n

Examining the next potential recession<\/h2>\n\n\n\n

Many experts believe the next global recession is soon at hand. There are several geopolitical factors that also play into a potential recession. Britain\u2019s exit from the European Union has brought to the surface fears of more countries venturing out on their own, and ultimately breaking the balance of power in the region. <\/p>\n\n\n\n

The rise of nationalist parties in Europe threatens to separate long-standing allegiances between nations, and hurt global trade and cooperation. In this scenario, European countries could be left to fend for themselves, lacking any backing from their peers in the region. <\/p>\n\n\n\n

As United States\nPresident Donald Trump continues his trade war tactics with nations like China,\nthe global economy is suffering. Trump has already instituted 25% tariffs on $200 billion<\/a> of Chinese goods exported to the US and\nhas shown no signs of backing down.<\/p>\n\n\n\n

In fact, recessions have already hit several nations, a possible sign of things to come for the global economy. Italy has found itself in recession territory<\/a>, with the country\u2019s GDP shrinking due to egregious levels of debt. Meanwhile, in Germany, analysts believe the country could be in a recession by the end of 2019. The country was on the verge of a recession<\/a> after its fourth-quarter GDP came in completely flat, narrowly missing the contraction which would have labeled the country in a recession. It\u2019s expected that on the year as a whole Germany\u2019s economy will only grow 1.1%, leaving not much margin of error. Overall, the entire eurozone is struggling to find its footing<\/a>, putting it in a precarious position heading into the rest of 2019.<\/p>\n\n\n\n

Have we learned our lessons?<\/h2>\n\n\n\n

The 2008 global\nrecession was fueled by the US subprime mortgage market, which brought the\nfinancial world to its knees. While we would like to think the economy learned\nits lesson, it appears there are similar trends to the mortgage crisis that are\nemerging today. Take, for instance, the car financing industry. More than 7 million Americans<\/a> have gone into delinquency on their car\nloans. In fact, these delinquency levels mirror those during the financial\ncrisis a decade ago. This has caused hesitation by the Federal Reserve to raise\nUS interest rates. <\/p>\n\n\n\n

Meanwhile, in Europe,\ncar buying has decreased by 10%<\/a>. In Germany this has been especially\ndamning, with new car production and exports falling substantially, putting\ndownward pressure on the country\u2019s economy. Oxford analyst Stephen Foreman\nnoted this issue. “Particularly vulnerable would be the German and Spanish\nindustries, with output falling 0.6 ppt and 0.8 ppt below baseline over the\nsame period,” he said.<\/p>\n\n\n\n

\"\"<\/figure><\/div>\n\n\n\n

The confluence of these\ngeopolitical and financial factors points to a world on the precipice of recession.\nHowever, recessions don\u2019t have to cripple your finances. If you play your cards\nright, you could even come out of a recession financially stronger than before.<\/p>\n\n\n\n

They aren\u2019t all bad<\/h2>\n\n\n\n

For those who can\nanticipate a recession, there is money to be made. The financial world is a\nzero-sum game, meaning, when one party loses money, another party makes money.\nThis makes it extremely important to not panic during a recession. By playing\nit cool, you can often find ways to make money in these times.<\/p>\n\n\n\n

However, playing a\nrecession correctly takes a significant amount of financial savvy and\nanticipation. For instance, immediately following the world\u2019s last recession in\n2008, many millionaires saw their wealth skyrocket<\/a>. These individuals were able to recognize\nsuppressed market prices as opportunities to add assets at low prices, and turn\nsignificant profits when the market recovered shortly thereafter. This was done\nby diversifying investment across a wide range of assets, and not settling for\nlow-interest savings accounts. If you want to take a note out of this playbook\nit will require you to have access to cash and\/or liquid investments at all\ntimes, ready to pounce on underpriced assets when the market goes into a\nrecession.<\/p>\n\n\n\n

One notable figure who has always seemed to find a way to make money during recessions is Warren Buffet. Buffet noted<\/a> how the key to coming out on top during a recession is to, “be fearful when others are greedy, and be greedy when others are fearful.” Following the most recent recession in 2008, Buffet used his stockpiles of cash to buy assets which he felt were undervalued. This proved to be extremely profitable for the financial guru, as he was able to benefit from a market which scared others away.<\/p>\n\n\n\n

You too could find ways to benefit from a recession. Make sure to do your homework and anticipate what assets might become undervalued when economies are in a downtrend. Doing so will allow you to leverage your knowledge<\/a> to get positive returns when others are fearful of the markets. <\/p>\n","protected":false},"excerpt":{"rendered":"

Recession. The word often conjures up thoughts of fear and chaos. Recessions don\u2019t only affect the global and local economy, but also investors, who can lose significant sums of money during such periods of time. To understand recessions, you must understand the cyclical nature of markets, previous recessions, and how certain factors play a role […]<\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[119],"tags":[],"class_list":["post-23108","post","type-post","status-publish","format-standard","hentry","category-financial-well-being"],"acf":[],"featured_image":null,"categories_names":["Financial Well-being"],"category_name":"Financial Well-being","_links":{"self":[{"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/posts\/23108","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/comments?post=23108"}],"version-history":[{"count":0,"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/posts\/23108\/revisions"}],"wp:attachment":[{"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/media?parent=23108"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/categories?post=23108"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/goandgrow.eu\/en\/wp-json\/wp\/v2\/tags?post=23108"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}