Recessions What are they?
A recession is where there is a TEMPORARY economic decline of the GDP (Gross Domestic Product) over two consecutive quarters.
Here are some of the causes which can trigger a technical recession.
High interest rates can cause a recession by reducing liquidity or the amount of money available to invest.
Inflation can be a driving factor for a recession. Inflation refers to the general rise in the price of goods and services over a period of time. Inflation causes you to pay more money for the same goods and services previously used.
*The trailing 12 month inflation rate for the uk is currently 1.5%
A reduced consumer confidence is another factor that can cause a recession. If consumers (like you and i) believe the economy is bad, we are then less likely to spend money. Consumer confidence is very much psychological but can have a real impact on the economy.
Reduction in real wages, this can be affected by an increasing inflation. When wages don't keep up with inflation it means the household has a reduced spending power.
Reduced real wages, another factor, refers to wages that have been adjusted for inflation. Falling real wages means that a worker's paycheck is not keeping up with inflation. The worker might be making the same amount of money, but his purchasing power has been reduced.
Now we know what a recession means and what causes one, how often do recessions happen?
Did you know surprisingly, they happen fairly often, looking over data roughly every 10 years.
Click here for the list of previous recessions.
The length of a recession also varies but on average it is about 11 months. We don't normally know or become officially in a recession till 3 months into it, this is due to having to wait for a quarter's data.
Now we know what causes a recession, roughly how often it happens and how long they last, what can we do to protect ourselves?
First things first is to focus and don't panic!
You will hear and read lots about the 'impending doom'. Yes recessions are not nice but there are steps we can take to protect ourselves and our families.
First, take a look at your life and make a plan. Take a look at your financial situation, what are your expenses compared to your income. Do you have savings/emergency funds?
First step is to make sure you have an emergency fund. General rule of thumb is between 3 and 6 months worth of bills or wages. You can have more, or even less depending on your situation.
You don't want to be dipping into investments nor do you want to be taking on loans and credit so an emergency fund is one of the best safety nets you can create for yourself.
That being said, you do want to make sure you have credit available in case the inevitable happens.
Have a look at your expenses, are there some subscriptions you don't use, or don't need. Many of us fall to something called life style creep. Where our expenses increase alongside our income, it's normally something we don't notice as its subtle changes, but something definitely worth looking into.
If you are really worried about a recession, another way of increasing your protection is to increase your income. This could be through getting another job, a pay rise or creating a different income source all together.
This recession has been very much expected. Due to Covid 19 almost halting most economies around the world a fall in GDP has been expected and nothing out of the ordinary considering events.
To note the stock market will be affected by a recession if you are a long term investor, remember, you have X number of years ahead. Don't let emotions rule your investments and stay coarse. If stocks do drop in value, they have a strong balance sheet and are healthy companies, you are actually presented with an opportunity to buy fantastic stocks at a lower price.
Make sure you have an emergency fund and invest wisely.
This recession is a bit different than the normal recession. Due to Covid 19 it created a perfect storm, with shops having to close down, people not being able to work or go out. it created a slump in the economy. Coming off the back of Covid it was very much expected. Looking at how the economy has played out in the last few months we can look at the causes which we went over at the beginning to realise this was inevitable, but it's certainly not the end of the world.
It seems our hands were forced into a recession but its now down to the government as a whole to get us out. In the mean time we should focus on our own finances
If you want to find more about how recessions have affected the stock market in the past here is a link to a blog which covers the last 6 recessions - click here
Want to know how investing into index trackers and adjusting your habits could help you build wealth? Click here