Recession anyone? (part 1)
By Randell Tiongson on August 9th, 2009We often hear the word ‘recession’ lately which prompted me to blog about it. Why is it that people fear recession too much? Is recession as bad as how we perceive it to be?
Let’s define recession. Recession may be deemed as significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP). When there is a severe or prolonged recession, it is referred to as an economic depression. Recessions also comes in different shapes – V, U, L and W. When the economic contraction is quick and followed by a rapid and sustained recovery, economists refer to it as a V shape recession. If there is a prolonged slump in the economy, it is informally termed as a U shape. A much longer decline, like 8+ quarters can be called an L shaped recession. Finally a W shaped recession is a term used when there is a double dip recession.
Nosebleed!
I like to look at the economy as a motor car engine. Any engine, no matter how efficient and durable it is, can’t run at full throttle for an indefinite period. Imagine driving your car at maximum speed continuously for days… at one point your engine will give in and break down. The economy is like that as well. When the economy is in constant growth, it will overheat and it will breakdown. Economic growth brings growth in disposable income; additional disposable income will allow people to increase consumption; increased consumption will drive up prices; increase in prices will result to inflation and so on and so forth. A state of balance is needed, or in economics terms, equilibrium. However, equilibrium can only exists in theory and there will never be an absolute equilibrium. When the car slows down, that’s like the economy going into recession.
The economy goes on cycles, recession is part of a cycle. Since recession is part of a cycle, we should not be in despair as it will come to pass … “We are hard pressed on every side, but not crushed; perplexed, but not in despair; persecuted, but not abandoned; struck down, but not destroyed.” (2 Corinthians 4:8-9, NIV)
Catch part 2, soon!
Recessions are actually the better part of a business cycle since it weeds out inefficient, unprofitable investments and forces liquidation of bad debts during the boom period. That’ one way to look at it.
Another point: it does not really matter whether the whole economy is in a boom or bust. The most important thing is to answer the questions of how are you going to be profitable. Certain great and legendary men in the investment world have learned to position themselves and profit in both good and bad times.
Thus, recession should not really be feared.
Well, Sir Randell, it’s really a blessing that people like you are continuously educating Filipinos about important matters such as these. I feel sorry for those who always think or feel that our economy is going down, no matter what the GDP figures say. They’re always pessimistic.
Great info!!
Great insights Elevic