We often hear that a recession is coming. You may be wondering, why do we worry about recessions so much? Let’s gain a better understanding of recessions by looking at what a recession is and what does it mean for the average Canadian.
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We often hear that a recession is coming. You may be wondering, why do we worry about recessions so much? Let’s gain a better understanding of recessions by looking at what a recession is and what does it mean for the average Canadian.
A recession is when a country’s economy experiences a steep decline in activity that occurs over several months or years. Economists say a recession is happening when a country’s Gross Domestic Product (GDP) falls for two straight quarters. GDP falling is usually coupled with higher rates of unemployment, lower retail sales and lower wage growth.
Although recessions are never fun, it’s considered part of any healthy business cycle in an economy, as an economy naturally expands and contracts. That being said, governments don’t want too steep of a recession, otherwise, you get the Great Depression in an extreme example, which happened in the early 1900’s, where governments had to bail out the economy to get it back on its feet.
Here are some of the main causes of recessions.
Too high inflation
Similar to debt, some inflation is good. However, too much of it can be a bad thing. How we can end up with a recession is that a country’s main tool for controlling inflation is interest rates. When a country raises interest rates, it’s playing a careful balancing act. It wants to raise rates without causing a recession. However, if it raises them too quickly, it can cause the economy to contract, which causes a recession.
Shock to the economy
The first thing that can cause a recession is a major jolt to the economy. This is an unforeseen event that negatively affects the economy. In recent times this would be the COVID. People were aware of COVID, but few saw it being as widespread and severe as it ended up being. Half a century ago when OPEC decided to cut of the U.S.’s oil supply with little warning, this caused a recession as well.
Too much debt
Debt can be a good thing if you use it in a smart way. However, it can be a bad thing if you take on too much of it.
Taking on too much debt can in worse case scenarios cause a recession. For example, let’s stay a business takes on a lot of debt to expand, but the business they were anticipating never arrives. If that happens, it could lead to the company being unable to pay its bills and this in turn causing a recession.
It all depends on how severe and widespread the recession is.
If it’s a mild recession, you may barely feel it at all. If it’s a severe recession, just about everyone in the economy might feel it.
If you’re able to hold onto your job during a recession, you should be fine. However, if you lose your job during a recession, that’s when you can experience tough times. You may find it really hard to land another job in your field, as employers tend to go on hiring freezes during a recession. You may be forced to take a job in retail just to get by.
A recession often means holding off on major spending. Even if you are fortunate enough to hold onto your job, the fear of losing your job can keep you from spending money. This in turn keeps the recession going and hurts other Canadians who depend on you spending money.
If the business you work in is considered more affordable, then you might benefit from a recession. For example, sales for Kraft Dinner and Walmart tend to go up during a recession, as consumers look for more affordable options.
Conversely, if you work for a company that sells luxury goods, a recession can be devastating to your business. Consumers are less likely to spend their money on luxury goods when they are struggling to put food on the table. This can in turn hurt your business and other businesses like yours at sell luxury goods.
Recessions are never fun, but if there’s a silver lining it’s that it’s only temporary. If you can get through a recession, you can out a lot stronger on the other side.
