Recessions: A Silver Lining?
You have heard about it and it is currently one of the biggest fears on people's minds amidst the economic slowdown caused by the coronavirus: Yes, this week's topic is about a Recession. But instead of focusing on the negatives we are going to look at the silver linings that accompany a recession. A recession is a significant decline in economic activity that lasts more than a few months. The greatest indicators of a recession are a drop in real GDP, income, employment, manufacturing and retail sales.
Inflation
In the event that a recession is caused by non cost-push factors it usually leads to lower inflation. Rising inflation tends to hurt the economy as it makes the value of one dollar today less than the value of one dollar yesterday, or for good comparison one dollar last year. In simple terms inflation decreases purchasing power. For people who have fixed income (that is not adjusted for inflation), this means that the wages decrease with a rise in inflation. A decrease in inflation therefore increases purchasing power and the value of money.
Fall in asset prices
For those already owning an investment account, a recession is a really bad time. But for those just starting their investment journey this can be an opportunity to put savings to good use. During recessions a lot of firms are hurt by both demand and supply side factors. This is usually reflected in the stock prices and makes it more affordable for people to purchase these stocks. As Warren Buffet says, “Most people are savers, and they should want the stock market to go down.”
End of shadow businesses
Shadow businesses are businesses that are present in the Shadow economy. The shadow economy is one that has informal employees and mostly makes all transactions via cash. These businesses tend to be unlisted or listed but heavily undeclaring taxes and earnings. The most notorious of these are companies partaking in scams and illegal activities. For instance companies involved in scam phone calls and phishing emails. During recessions these companies tend to die off. This leads to a significant reduction in such shadow companies. This is something that is really good for the economy.
Policy review
Every recession forces governments to take a look at how hard the recession hit the economy and ways this can be avoided in the future. Most times a call to review weak policies is made, and policies that are better for the future are implemented. The new policies are usually ones that positively impact society as a whole.
All positives listed above aside. Recessions are destructive and can have long lasting effects on the economy. The negatives far outweigh the positives of a recession, and that is why governments are scrambling to stimulate the economy amid the slowdown. As many doctors like to say, “Prevention is better than cure”, and positives aside, the amount of effort being taken to prevent a recession is necessary to avoid long-term damage to families and the economy as a whole.
