What Is A Recession?

Recession is a scary word. In truth, it can mean almost nothing or it can be absolutely hideous. So, how do we define recession and do we really know one when we see it?

In 2022, there were 2 quarters of negative GDP growth in the US and the media’s reaction to this minor technical recession was akin to the 2008 financial crash.  In truth, a technical recession rarely captures the true nature of a classic recession.

The features associated with a classic recession are a broad based and persistent decline in activity for more than a few months. Recession can often be seen as a process rather than an event. The key to a real recession tends to be the labour market. The classic recessionary process is when companies begin to terminate their workforce. At this point, confidence goes down which leads to spending reducing which has a knock-on effect to corporate revenue. Of course, lower corporate revenues lead to more job cuts. This tends to be the true reflexivity of a recession.

When this process begins it is usually nonlinear. Looking at the history of recessions we can see a huge variation in the severity both over time and across countries. How quickly the dynamic of job losses begins varies from country to country partly due to labour law.

A German or Japanese company try to delay cutting jobs because it is so expensive to fire someone and then hire back a replacement. Whereas in the U.S. there tends to be much quicker decisions to reduce the workforce. This leads to a more V-shaped recessions in the U.S., faster downturns but faster recoveries too.

There is an old joke about pornography, you can’t define it but you know it when you see it. With a recession, you know a recessionary process when you are in one which is why suggesting the U.S. have two quarters of GDP negative growth should be described as recession when every month U.S. companies were hiring huge numbers of workers as this isn’t a recessionary dynamic.

It’s not what we are seeing now either, every payroll report in the U.S. is reasonably positive. Also, in Europe there are positive employment dynamics.

The next recession has been forecast for very a long time. Many economists say that we should be in a recession by now. Some claim that a mild global recession will be seen in 2023. Its worth noting, economists are famously hopeless at predicting recessions whether it technical or classic. There’s an IMF paper from a few years ago which claims economists have failed to predict 148 or the last 153 recessions.  The last recession that economist predicted correctly was in 1981 when Paul Volcker (Head of The Federal Reserve Board) raised interest rates to 20% – almost anyone should be able to figure out interest rates that high are going to kill the economy.

There have been several fake recession signals in the last 12 months. Contraction in manufacturing and global leading indicators. This was always likely to happen on the other side of COVID. For the last 3 years we have been a “fake” business cycle. Shutting and reopening the economy and huge amounts of stimulus. There was nothing organic about that. These were policy induced business cycles.  For 18 months most of the world sitting at home with nothing else to do but buy from the internet – how could you not have a major manufacturing contraction after that?

So, is the recession going to be as mild as they say or have they got it wrong?

The question for the recession called this year, is are we getting to the point where central banks are about to break the economy?

Concern over going back to a 1970’s economy is unfounded. There is no real evidence to suggest this is the way the economy was heading. It seems to be more of a personal fear of central banks that they may repeat the mistakes of the past.

4-5% interest rates for Europe and the U.S are historically quite normal interest rates, just not since 2008. Although, returning to more normal interest rates has been done at phenomenal speed – 12 interest rate rises in a row in the UK.

It would be unwise to attempt to predict when the economy will be pushed back into a recession but individuals can protect themselves by taking simple financial planning steps.

How to protect your finances.

Protecting personal finances during a recession is crucial for individuals to weather the financial challenges that come with an economic downturn. Here are some steps individuals can take to safeguard their personal finances:

• Build an Emergency Fund: Start by establishing an emergency fund that can cover three to six months’ worth of living expenses. This fund acts as a safety net during times of financial uncertainty, providing a cushion for unexpected expenses or job loss.
• Reduce Debt: Minimize debt as much as possible, particularly high-interest debt such as credit cards. Focus on paying off outstanding balances and consider negotiating with creditors for better terms or interest rates.
• Create a Budget: Develop a detailed budget to track income and expenses. Identify areas where expenses can be reduced and prioritize essential spending. By living within your means, you can allocate more resources toward savings and debt reduction.
• Diversify Income Sources: Explore ways to diversify your income streams. This could involve taking on a side job, freelancing, or developing a small business alongside your primary employment. Multiple income sources can help mitigate the impact of a job loss or reduced work hours.
• Invest Wisely: If you have investments, review your portfolio and ensure it aligns with your risk tolerance and long-term goals. Diversify your investments across different asset classes to minimize risk. It’s generally recommended to consult with a financial advisor to make informed investment decisions.
• Protect Your Career: Enhance your skills, stay relevant in your industry, and build a professional network. Continuous learning and development will improve your marketability and increase the chances of retaining your job or finding new opportunities.
• Evaluate Insurance Coverage: Review your insurance policies, including health, life, home, and auto insurance. Ensure that you have adequate coverage to protect against unexpected events or emergencies. Adjust coverage if necessary to strike a balance between protection and affordability.
• Be Frugal and Prioritize Savings: Adopt a frugal mindset and cut back on non-essential expenses. Look for ways to save on everyday costs, such as utilities, groceries, and entertainment. Redirect those savings into your emergency fund or long-term savings.
• Seek Professional Advice: If you feel overwhelmed or unsure about your financial situation, consider consulting with a financial planner in Singapore. They can provide personalized guidance, help you navigate through challenging times, and create a tailored financial plan.
• Stay Informed and Remain Calm: Stay updated on economic trends, government policies, and financial news. Understanding the broader economic landscape can help you make informed decisions. However, avoid making impulsive financial moves based on short-term market fluctuations. Instead, maintain a long-term perspective and stay focused on your financial goals.

Remember, everyone’s financial situation is unique, so it’s important to assess your own circumstances and make decisions based on your specific needs and goals.

If you would like information on any of the above areas or any other area of financial planning, please contact.
Matt Baker, Managing Director, Singapore Expat Advisory
Email: advice@singaporeexpatadvisory.com
Tel/Whatsapp +65 9432 8781
www.singaporeexpatadvisory.com

Singapore Expat Advisory is an agency for Promiseland Pte. Ltd and are authorised and regulated by the Monetary Authority of Singapore (MAS).
General Information Only This article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any products (including funds, stocks) mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment. This article has not been reviewed by the MAS.