Today, experts around the world are debating whether another recession is looming.<\/p>\n\n\n\n
Recession is a word that we have all probably heard before, and what follows is often the fear of the unknown. The good news is that a recession doesn\u2019t have to hurt your finances. To be prepared, it\u2019s best you understand the theory behind what it means for an economy, and how you can turn this to your advantage. <\/p>\n\n\n\n
Let\u2019s see what a recession is<\/h2>\n\n\n\n
Contrary to popular belief, economies are not always growing at a steady pace. Economic performance can fluctuate from one period to another \u2013 but this doesn\u2019t mean we\u2019re in a recessionary environment. So what is a recession? <\/p>\n\n\n\n
Put simply, when an economy declines for two consecutive quarters, then it\u2019s regarded as a technical recession. Generally, this is identified by two successive quarters experiencing a fall in GDP. <\/p>\n\n\n\n
![\"Can](\"https:\/\/www.goandgrow.eu\/blog\/wp-content\/uploads\/Can-you-make-millions-in-a-recession-1024x552.png\")
<\/figure><\/div>\n\n\n\nSo what\u2019s the cause of a recession? <\/h2>\n\n\n\n
When an economy hits a period of prolonged expansion, inflation can rise. At some point, the economy will have no more room for growth in its current cycle and will hit a peak. As prices rise, demand from consumers will fall, causing businesses to start cutting their production and reducing employment. This cascading effect of higher unemployment and a reduction in consumer demand, followed by businesses scaling down, is what ultimately leads to an economic recession.<\/p>\n\n\n\n
The impact of supply and demand<\/h2>\n\n\n\n
Here\u2019s one thing that has a significant impact on an economy – the forces of supply and demand. Take, for instance, when there\u2019s a high demand for a specific asset. The price for this asset will rise and may skyrocket. The more buyers believe that the value of the asset will continue rising, the price will continue to rise. Sooner or later, the buyers or investors will realize that the price has been driven up too high and then make a major sell-off, which will cause a sharp drop in the value of the asset.<\/p>\n\n\n\n
This is similar to what happened in the 2008 mortgage crisis. The derivatives market underlying home mortgages were thought to be bulletproof until it was found that a significant number of mortgage holders couldn\u2019t pay their debts. The reasons behind this could take a whole video in itself to discuss \u2013 but overall, it can be attributed to rising interest rates, inaccurate ratings of the underlying bonds, and irresponsible lending. This caused massive defaults in mortgages, and with it, a collapse in the housing and financial markets almost overnight.<\/p>\n\n\n\n
Let\u2019s talk about the concept of recession cycles<\/h2>\n\n\n\n
While business cycles can be predicted to some degree, their duration and magnitude cannot. Over time, a variety of business cycles have brought recessions of varying degrees. The 2001 post-dot-com recession was short, lasting only 8-months following a quick rise in internet-based businesses. On the flip side, the Great Depression in the United States was devastating, lasting 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, 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 given the general business cycle. The latest recession was over a decade ago, meaning, it\u2019s not unreasonable to think another recession is waiting in the wings.<\/p>\n\n\n\n
Geopolitics and recessions <\/h2>\n\n\n\n
Geopolitics can play a role in recessions too. 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
In the United States, President Donald Trump continues his trade war tactics with nations like China, the global economy is suffering. Trump has already instituted 25% tariffs on $200 billion<\/a> of Chinese goods exported to the US and has shown no signs of backing down.<\/p>\n\n\n\nHow is Bondora preparing for a recession?<\/h2>\n\n\n\n