Traders and investors are worried about a global recession after analysing the clues in the markets. The first 6 months of 2022 have been challenging, to say the least. The uncertainty surrounding the global economy has manifested its effects in every sector of the financial markets and in our everyday lives.
How can you stay calm and confident in such turbulent times? The first step is to truly understand what is going on. Once you get a good sense of what is happening with the global economy, you will be in a better position to understand how it is affecting the markets and even be able to predict future changes in the markets. Keep reading below to get a better perspective of what a recession looks like.
What is a Recession?
In simple terms, an economic recession occurs when economic activity declines dramatically for several months or even years. An extended period of negative gross domestic product (GDP), rising unemployment, declining retail sales, and contracting income and manufacturing are considered recessionary indicators. It’s important to remember that recessions are considered an unavoidable part of the business cycle, existing as part of the expansion and contraction periods of a nation’s economy.
What Can Cause a Recession?
While there are various factors that can lead to an economic recession, there are 4 prominent causes that define the inevitability of a recession.
- Loss of Consumer Confidence. Market economies are driven by consumer spending which is based on consumer confidence. This economic indicator measures the degree of consumer optimism regarding a country’s financial situation. Therefore, if for some reason there is a decline in consumer confidence, this means that consumers have become less certain about the economy’s outlook, making them spend less money on products. Eventually, this has a damaging effect on businesses as they witness a massive decrease in their sales.
- Increasing Interest Rates. Interest rates are often changed by central banks as an act of trying to handle economic activity. A rise in interest rates limits liquidity, which is the amount of money available to invest or spend. As a means of protecting the dollar, the Federal Reserve has often raised interest rates. It did so, for instance, during the late 1970s to combat stagflation, which contributed to the 1980 recession.
- Bearish Stock Market. A global economic crisis can often lead to a long-term speculative sentiment in the markets. This means that investors are hesitant to invest in financial assets, resulting in a drop in stock prices. The bearish movement in the markets signifies a loss of confidence in investing with devastating consequences for businesses.
- Too much deflation or inflation. The steady increase in prices over time is known as inflation, while deflation occurs when prices decline over a period of time. Both of these phenomena can have excessive consequences on the markets and the economy in general. In order to control inflation and deflation, central banks step in to control the situation, either by rapidly increasing interest rates or by reducing them. Throughout history, inflation and deflation have caused severe recession periods.
How Long do Recessions Last?
As we’ve mentioned, the inevitability of recessions suggests that traders and investors need to be aware that they can occur over any period of time. It is impossible to predict exactly how long a recession will last, as it could be a few months or even years.
Being Prepared
The key to staying ahead of the markets is to be prepared for any outcome. It’s essential to always be aware that every economic event can have either positive or negative effects on your trading positions. The bottom line is that you need to be up to date with everything that is happening to the global economy and work on your trading strategies so that you don’t lose your confidence in the markets.
