What Causes A Recession?
Recessions. We all know they’re part and parcel of the economic cycle, but what causes them? And when could the next one be headed our way? Read on to find out. After that, we’ll give you an overview of what will be a busy week in the markets.
What’s A Recession?
A recession is a tipping point in the business cycle when economic growth peaks, reverses, and then contracts for a lengthy period of time.
Recessions are a core part of the economic cycle, after all, what goes up must come down! But how do recessions actually begin?
The 8 Causes Of Recessions
Throughout history, recessions have tended to occur when one or more of the following happens:
- Loss of confidence in investment and the economy
- High interest rates
- A stock market crash
- Falling Housing Prices and Sales
- Manufacturing Orders Slow Down
- Poor Management
- Post-War Slowdowns
- Deflation
What Happened With The Last One?
The 2008 crash was all about number 4 on that list above. Housing.
In the early 2000s, many people had been buying up houses they couldn’t afford, financing the buys with extremely risky loans. They were hoping that house prices would only appreciate in value.
However, low-interest rates in 2004 and 2005 helped to create a housing bubble. Many of these homeowners defaulted on their mortgages, which ultimately led to foreclosure by the banks holding those mortgages.
The size of these foreclosures panicked banks and hedge funds because some of them had heavily invested in mortgage-backed securities. So things were looking pretty scary for them at that point. Banks then became afraid to lend from August 2007, because they didn’t want these mortgage loans as collateral.
The US government launched an economic stimulus plan in 2009, planning to spend $185 billion in 2009. It actually successfully stopped a four-quarter decline in GDP in Q3 2009, ending the recession. Woohoo!
Technically, the US suffered a recession in 2020, but that was mainly due to the impact of covid lockdowns. We skipped that one as it is a bit more self-explanatory and it wouldn’t have allowed us to show off as much!
When Will The Next Recession Be?
It’s difficult to say but if you believe a growing number of analysts, the next recession is already on its way. Coming to an economy near you in 2023.
The US Federal Reserve recently raised interest rates for the first time since 2018. In forecasts released with the rate decision, Fed economists lowered their economic growth projections for 2022.
At the same time, you may have noticed that high inflation is putting a strain on consumers, while the Russian /Ukraine conflicts added to their burden, pushing oil prices up all over the world and threatening any major economic growth in the near future.
The US economy is still pretty healthy, particularly employment rates. There’s a long way to go until 2023. Who knows what the next 8 months will bring…
What Do You Think?
When do you think the next recession will hit? Let us know by tweeting us at @_Contentworks!
Top trading events week commencing 25.04.22
There’s a fair bit going on this week, here’s when and where you need to tune in.
Monday
● No specific events are planned.
Tuesday
● USD — Durable Goods Orders MoM (MAR); CB Consumer Confidence (APR)
Wednesday
● AUD — Inflation Rate YoY (Q1)
Thursday
● JPY — BoJ Interest Rate Decision; BoJ Quarterly Outlook Report
● USD — GDP Growth Rate QoQ Adv (Q1)
Friday
● EUR — Core Inflation Rate YoY Flash (APR)
● USD — Core PCE Price Index YoY (MAR); PCE Price Index YoY (MAR); Michigan Consumer Sentiment Final (APR)
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The Contentworks team
