The recession is a phase characterized by a reduction in the level of economic activity, here are the causes and its consequences.
The recession is a phase of the economic cycle in which productive activity is reduced and GDP tends to contract significantly. In short, it is a moment opposed to economic expansion and growth.
There are actually different definitions of recession. According to the two-stage taxonomy of the US business cycle W.C. Mitchell, it corresponds to the entire descending phase.
According to the 4-stage theory by J.A. Schumpeter, on the other hand, the downward phase is divided into two sub-moments: the recession is the first sub-moment and is then followed by the depression. In general, however, the meaning of the term indicates a phase in which economic activity and therefore GDP contract.
What are the consequences of the recession for the economy
Once you understand what the economic recession is (not to be confused with the technical recession) you need to understand what happens during this particularly challenging phase.
The main consequences of a recession on the economy are certainly: a drop in production affecting some goods or generalized for the whole market; a strong volatility on the financial markets and in particular on shares; finally, an increase in inflation and therefore in the cost of living in general.
Those mentioned are just some of the possible consequences of the recession. The deeper the latter is revealed, the more these scenarios tend to manifest themselves, and vice versa. Not all economic downturns manifest themselves in the same way and with the same intensity.
To these main consequences there are also others based on the historical and social context, including:
- decline in productivity;
- increase in unemployment;
- decrease in consumption;
- lower demand for goods and services;
- decline in consumer and business confidence;
- less access to credit;
- decrease in the purchasing power of households;
- closure/bankruptcy of companies.
But how long does the recession last and above all how do you get out of this phase? In recent years, at least from 1945 to today, the recession phases have had an average duration of about 10 months.
To exit the recession there are different solutions depending on the historical period and the seriousness of the situation, the most common are:
- by cutting the expenses of the country in recession;
- increasing the demand for goods;
- with the intervention of central banks to cut rates in order to restart production and investments.
How to invest and protect your capital during the recession
During a period of recession, patience is the first fundamental rule. To counteract the volatility of the market there are several paths and strategies that can be taken, certainly invest long-term and maintaining a well-diversified portfolio can be a great way to protect your capital.
Alternatively, during a recession it is good to use safe-haven assets or commodities as hedges, diversify on currencies other than the euro and, trivial but always valid, try to avoid making emotional and hasty decisions.
When investing it is advisable to focus on defensive and quality stocks, you can improve the resilience of equity portfolios with exposure to value stocks that generate income.
You can focus on financial instruments considered safer: such as government bonds (BTP) or on individual savings plans if you look at managed savings. In recession, it is strategically important to exploit market volatility to your advantage to mitigate downside risks as much as possible.
Original article published on Money.it Italy 2022-10-23 15:14:02.
Original title: Quando si va in recessione e quali sono le conseguenze per l’economia
