What is recession, how does it occur and what can recession mean for you? Read about the economic downturn and find out all about recession.
A recession is a period of economic decline in which a country's gross domestic product (GDP) falls. It is often characterised by GDP falling for at least two consecutive quarters. The National Bank of Denmark calculates whether Denmark is in a recession.
A recession occurs when the economy is in decline. It often follows inflation, where demand for goods and services has been rising for an extended period of time and the country's unemployment rate falls while incomes rise.
This situation is not sustainable for long periods, so central banks raise interest rates to curb inflation, which may eventually lead to a recession.
It is difficult to point to single factors that can cause economic decline. The last two examples we have of recessions are in 2001 and 2008. In 2001, the IT bubble burst after it became clear that expectations for new IT companies were at a level far above reality.
The biggest and most well-known example in recent times occurred in 2008-2009 and led to the financial crisis. The crisis became a reality when the housing market in the US collapsed after homeowners had mortgaged themselves into homes that were too expensive for what they could actually afford.
Recessions have historically originated in the US, which is the world's largest economy and therefore has a major impact on the rest of the world economy. Due to the high level of trade between the EU and the US, a recession in the US would quickly have an impact on our side of the Atlantic.
However, it does not necessarily go the other way, as the US has such a large economy that European recessions will not necessarily affect the US economy.
However, we have experienced a recession in Denmark that did not stem from the US economy - namely the so-called potato cure. In 1987, the Schlüter government decided to introduce a fiscal policy that reduced private consumption and borrowing. This followed a period when labour market incomes had risen sharply and the Danish economy was overheating with high inflation.
The government introduced the most sweeping measures ever in Danish fiscal policy to curb the unsustainable growth in the Danish economy and made it more expensive to borrow for consumption and housing - Danes would now eat less meat and more potatoes.
The intervention meant that unemployment rose and the housing market took a downturn, but the Schlüter government managed to curb rising inflation and Denmark was in economic decline until 1993, when the new government led by Poul Nyrup Rasmussen got the economy moving again.
If a recession is persistent, it may become known as a depression. There is no fixed definition of when a recession has become a depression, but it is generally accepted that a depression occurs if the country's GDP falls by more than 10%.
This became a fact after the Wall Street crash of 1929 in the US, which led to the biggest crisis in the history of the world economy, and in Finland, which in the 1990s was transforming itself from its former close trade with the Soviet Union.
During a recession, you'll have less money between your hands and be at greater risk of losing your job. More businesses often have to close as demand for their goods and services falls. However, interest rates will also typically fall when there is an economic downturn.
Stock markets are also hard hit by recessions. On average, they will cause a 25% fall in the stock market, but sometimes it can be even higher, as some companies you can buy shares in can lose a large part of their value.
In this context, it may be wise to invest in assets that offer fixed returns and low risk. An example of this is crowdlending, where you lend your money to a construction project, which then has to repay your loan with interest. A typical interest rate on crowdlending through Fundbricks is 8-12% p.a. for up to 6-18 months.
Read more about your investment options through crowdlending here.
You can also read more about investment portfolio diversification and learn more about the concept.
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Historical returns are no guarantee of future returns. The money you lend to projects can therefore increase or decrease in value and there is no guarantee that you will get back the full amount lent.
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