In February 2024, the UK announced it had fallen into recession in the second half of 2023. Due to a much more severe contraction in the last quarter of the year, it joined Japan to became the second G7 country now in an economic downturn. Afterwards, Citi’s chief US economist stated that he expects the US to fall into recession in the middle of 2024. But what exactly is a recession? And if one is coming, how could it affect you?
Slowed consumer spending
Economists are predicting a year of slow growth around the world in 2024. Consumer spending is slowing down, with further uncertainty ahead.
The US economy performed better than expected in 2023, which led the World Bank to announce that the recession risk had receded for the country in 2024.
Economic fallout from crises
However, the economic fallout from wars in Ukraine and the Middle East, coupled with persistent high inflation, make the possibility of growth “sluggish.”
What is a recession?
A recession is a significant, widespread, and prolonged downturn in economic activity. Generally, a country must have at least two quarters of negative GDP (gross domestic product) growth to be deemed in a recession.
More complex formulas are also used, that take into account things like industrial production, non-farm payrolls, and retail sales.
A persistent decline
To be considered a recession, there must be a persistent decline in economic activity, that is significant and pervasive.
The actual recession itself may only last a few months. However, the effect of the downturn can mean the economy fails to recover to its peak for several years.
Unemployment rate
Apart from the aforementioned markers, the unemployment rate is another way to measure whether a recession is in the cards.
Consumer sentiment
Consumer sentiment is another key indicator of recession. The cost of living crisis has caused people to spend less, which in turn leads the economy to contract.
What happens in a recession?
In a recession, employment and consumer spending drops. Graduates and school leavers could also face more difficulty finding work.
As stock markets fall, the value of investments declines. There is an increase in foreclosures as people default on debts, and banks are less likely to lend.
These factors combine to lower the government’s tax take, making the country’s budget deficit larger. At the same time, government spending on social programs and unemployment rises.
Stock market contraction
When stock markets fall during a recession, this can lead to panic in the markets. Since World War II, there have been 12 recessions in the US. According to Goldman Sachs, the US index of stocks–the S&P 500–contracted by a median of 24% during these downturns.
Corporate profits
Corporate profits (as well as stock prices) would go down in a recession. If companies are unable to raise prices because of low spending, corporate earnings fall. This can lead to layoffs.
How long do they last?
On average, US recessions have lasted for 17 months. However, since the 1980s, several recessions have lasted less than 10 months on average.
When was the last recession?
At the outset of the COVID-19 pandemic in 2020, there was a two-month downturn in the economy that qualified as a recession despite its short duration.
Unavoidable?
Recessions are accepted as a part of the business cycle. They form part of the regular pattern of expansion and contraction that occurs in a country’s economy, and are therefore unavoidable.
Signs of a recession
The labor market is the first place to show signs of a recession, but there have been strong numbers there, with 353,000 jobs added to the US economy in January 2024.
However, job numbers are only part of the picture. The number of full-time workers has decreased, and the number of hours worked is falling.
Credit card delinquency
Credit card delinquency is on the rise, with one top economist stating the consumer credit default cycle has arrived already. Currently, one in every 12 credit card holders is missing their payments.
Retail sales
Another indicator, retail sales, has also shown signs of falling. There was a 0.8% decline in retail sales numbers in January 2024.
A soft landing
Economists have been talking about a “soft landing” occurring rather than a full-blown recession, but it’s unclear if that’s still possible.
A soft landing is when the economy slows enough to bring inflation down to the Federal Reserve’s 2% target, without falling into recession.
Inflation
In a soft landing, the price of goods doesn’t drop even though the rate of inflation steadies. Instead, over time, wages increase to boost purchasing power again.
Stagflation
In contrast, in a recession inflation usually falls faster. However, in the recessions of the 1970s, inflation didn’t decrease, leading to a term called “stagflation.”
Among economists, the consensus appears to be that they don’t expect stagflation to return in the next year. Time will tell.
Interest rates
When inflation gets closer to 2%, the Fed usually cuts interest rates. This reduces the cost of having a mortgage or business loan, for example.
In a soft landing, interest rates would remain higher than in a full-blown recession. In a recession, interest rates would probably be cut lower.
It’s not looking good
Whether 2024 sees a soft landing or a recession by the summer is unclear. However, economists are setting the tone, which seems to be one of preparing for the worst.
Sources: (Business Insider) (BBC News) (Forbes) (Investopedia) (World Economic Forum) (AP News)