Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.
A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.
- Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
- Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
- Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
- Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
- It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
- Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
- It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR
The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.
Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.
After the Lawson boom and double-digit inflation, the 1991 Recession struck.
Efficiency increase?
It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.
Covid Recession 2020
The Covid-19 epidemic was to blame for the terrible recession of 2020. Some industries were particularly heavily damaged by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).
Profitability hasn’t kept pace with Amazon’s surge in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.
Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.
The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics effect the firm as well as aggregate demand.
Are there any advantages to a recession?
- The economy slows, unemployment rises, and businesses fail during these periods of recession.
- A recession, on the other hand, may have advantages, such as weeding out underperforming businesses and lowering asset sale prices.
- Inappropriate government policies can minimize or eliminate many of the benefits of the recession.
How might a recession assist you financially?
During a recession, you might be tempted to sell all of your investments, but experts advise against doing so. When the rest of the economy is fragile, there are usually a few sectors that continue to grow and provide investors with consistent returns.
Consider investing in the healthcare, utilities, and consumer goods sectors if you wish to protect yourself in part with equities during a recession. Regardless of the health of the economy, people will continue to spend money on medical care, household items, electricity, and food. As a result, during busts, these stocks tend to fare well (and underperform during booms).
What kind of occupations withstand a downturn?
8 industries with the best job security during a downturn
- Health-care services. People get sick and require medical care regardless of the state of the economy, thus the demand for health-care occupations is fairly stable, even during a downturn.
In an economic downturn, who wins?
Another dreadful and far-reaching result of the crisis is the widening of mortality gaps. Because of unequal access to health care, health care inequities, and unequal access to healthy living locations with fresh air, fresh food, and walkable places, longevity disparity was already developing before the epidemic. Due to the virus’s influence on people with diabetes and other co-morbidities, those most at danger of dying young are also those most badly affected by the recession.
Those who keep their jobs and hours, can work from home, and those with surplus cash and wealth can buy what owners in need of cash sell: lower-priced small businesses, lower-priced stocks and bonds, and possibly even a lower-priced house or two, are the winners in every recession. More wealth, income, and health inequity will result from the COVID-19 recession.
During recessions, do people save more?
In many ways, the year 2020 was exceptional, including this one: At the commencement of the COVID-19-induced recession, the personal saving rate soared. Personal saving rates are significant for a variety of reasons: Large shifts in savings can have a significant impact on the financial markets. Furthermore, the personal saving rate may reflect people’s expectations for how long a recession will last. When people predict a long-term economic slump, they are more likely to savethis is known as the “precautionary” incentive for saving. People will likely use their savings to maintain their consumption if the slump is not projected to endure long; that is, they will continue to pay their rent, mortgage, electricity bills, and other bills.
The personal saving rate in the United States is depicted in Figure 1. The National Bureau of Economic Research has dated the recessions in the shaded areas. Three key points are highlighted in the diagram: First, the saving rate changes gently throughout time, with the noticeable exception of 2020. It remained stable in the 1960s and 1970s, then fell from the late 1970s to the first half of the 2000s, before rising again. From 1959 to 2019, the saving rate averaged 11.8 percent and was typically within 4 or 5 percentage points of that figure. Second, during recessions, such as during the outset of the 2007-09 recession, the saving rate increased, but these swings were not as substantial as prior fluctuations. Third, in 2020, the saving rate soared to an extraordinarily high level, approaching 35%. It began a dramatic fall almost immediately, but it remains high in comparison to historical averages.
What aspects of the savings rate played a role in the recent increase? Between 2019 and 2020, Table 1 displays the quarterly percentage increases in personal disposable income and personal outlays. In comparison to the same quarters in 2019, disposable income climbed significantly in the second and third quarters of 2020: by 12.9 percent in the second quarter and 8.1 percent in the third quarter. In the first quarter of 2020, it climbed by 3.1 percent, which is lower than the 4.4 percent average quarter-to-quarter change since 2015. (not shown in the table).
The contributions of the components of disposable income to the growth rate of disposable income are also shown in Table 1. The pandemic-induced slowdown in economic activity reduced employee compensation by 2.7 percentage points in the second quarter of 2020. Other sources of income dropped at a slower pace. Net transfers, which contributed 16.7 percentage points in the second quarter of 2020 and 7.3 percentage points in the third quarter, are thus solely responsible for the large increase in disposable income. The prominent functions of unemployment insurance and other transfers, such as stimulus checks, are shown by further dissection of the shift in net transfers.
Personal outlays fell in the second and third quarters of 2020, in contrast to disposable income. In the second and third quarters, personal consumption expenditures were mostly responsible for the declines, and falls in those expenditures were primarily due to decreases in services. It’s worth noting that during the second quarter of 2020, all components of consumption fell, however just services fell in the third quarter. The statistics in Table 1 cannot be used to determine whether the decrease in consumption was due to more saving or less buying due to the closure of several services (e.g., restaurants).
As a result, the savings rate improved due to two factors: higher personal disposable income and lower personal consumption. The former was supported mostly by government net transfers, whereas the latter was powered by lower service consumption.
Figure 2 shows that the gain in income benefited American households and was primarily due to an increase in transfers, which the federal government funds through borrowing. As a result, the rise in household savings corresponds to the rise in government borrowing. If households in the United States know that their government benefits will increase government debt and future taxes, they may have sensibly opted to save the majority or all of those benefits in order to pay those future taxes.
The Federal Reserve Bank of St. Louis will hold a meeting in 2021. The author(s)’ opinions are their own, and they do not necessarily reflect the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
Inflation favours whom?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.
In a downturn, where should I place my money?
Federal bond funds, municipal bond funds, taxable corporate funds, money market funds, dividend funds, utilities mutual funds, large-cap funds, and hedge funds are among the options to examine.
Do things get less expensive during a recession?
Lower aggregate demand during a recession means that businesses reduce production and sell fewer units. Wages account for the majority of most businesses’ costs, accounting for over 70% of total expenses.