How Long Do Economic Recessions Last?

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How Long Do Economic Recessions Last?

Rounding it up

  • A recession is an extended period of economic downturn. In such a period, wages, employment rate, production, economic output, and other economic factors decline.

  • Recessions typically occur after monetary and fiscal tightening.

  • These days, recessions are shorter and less frequent than they used to be.

  • When in recession, it’s best to protect all your financial interests. This must be done calmly and cautiously.

4 min read

Joseph Iyanu
#recession#economics#financial management

Most of us get intimidated by a recession in the economy. The slowed-down economy, high unemployment rate, low production output, and economic downcast, in general, is something we don't want. However, they’re sometimes inevitable.

Based on data from previous cases of recession, the economy is already in recession before the majority realizes it.

Recent studies show that approximately 70% of Canadians feel a recession is coming, while 20% insist it has occurred already. Regardless of the data, if a recession should happen, how long will it last, and how will it affect the economy of Canada? What does it mean for Canadians and their money?

We can't tell how long it will take for the economy to grow out of a recession, but looking at the greener side, the recession will eventually come to an end. What matters is being prepared before it begins.

How Long Do Economic Recessions Last?

Recession is one of the most feared and misunderstood terms in economics. They’re a result of a contracting of the economy and they typically bring with them reduced employment rate, increased prices, declining stocks, and many other negative financial situations for the government, as well as employers and employees.

A recession in the economy ends when there is significant growth in the economy and not when the economy returns to its initial state before the recession. Still, how long does a recession last? Based on multiple factors, the duration of a recession could vary.

The most important thing here is keeping and properly managing your stocks and all other financial assets. Now, how do you go about that? How do you survive a recession? Here, we’ll take a look at how long a recession lasts, the causes, and how to survive a recession. Before that, though, let’s better understand what an economic recession is.

What is a Recession?

A recession in the economy is when there’s a contraction in the nation's financial system for two consecutive quarters. This contraction is determined by the gross domestic product (GDP). recessions are declared by the National Bureau of Economic Research (NBER), which they determine by looking at certain signs in the economy.

The NBER declares a recession based on a few factors. It doesn't just study the GDP to declare a recession, it also looks at the following indicators:

  • A significant decline of the real GDP.

  • Decline in real income.

  • Decline in consumer spending.

  • Stagnation or decline in industrial production.

  • Increase in unemployment.

How Does a Recession Affect the Stock Market?

The stock market is based on what the economy is expected to yield during a period, usually six months to a year. And stocks typically go own during a a recession. While you probably can’t predict when the next recession will begin, it’s wise to consider how it could affect your stock portfolio.

In the past, the stock market has followed this general trend: near the end of a recession, it bottoms out and starts rallying as the economy improves.

During recessions, it’s good to take a close look at your portfolio to determine what you should do with your investments. As an investor, you can review your overall asset allocation to make sure it’s balanced and diversified.

In addition, it is best for investors to research companies with solid balance sheets, steady cash flow, and healthy growth runways capable of withstanding short-term volatility. Even when the economy is in recession, some companies remain profitable. Those companies are typically the ones that provide services and products we can't do without, like food manufacturers, healthcare companies, telecommunication services, internet providers, and the like.

What Causes a Recession

Ordinarily, we can't easily tell when the economy is in recession, much less what causes it. Determining the causes of a recession is not impossible, but it’s not an easy task either. To start, different periods of recessions have different depths and degrees. They do usually have something in common, though: an external shock in the economy, which can be from demand or supply. In addition, the NBER has identified other factors responsible for a recession. Below are the factors that generally cause a recession.

A Shock in the Economy

An unpredictable event with a significant impact can cause a disruption in the economy of a nation. Examples of such events are natural disasters, pandemics, and terrorist attacks. The most recent recession we experienced was caused by a pandemic – the coronavirus outbreak.

Asset Bubbles

Asset bubbles involve the rapid increase in the prices of investments (real estate, stocks, etc.) above their fundamentals. The rapid increase in price is preceded by an exaggerated, inflated demand that eventually vanishes–this is where the bubble bursts. As a consequence, a lot of money is lost, and the victims of such loss lose confidence. To recover from and balance the lost money, people resort to significantly reducing their spending, which impacts a recession.

Deflation

Deflation happens when there is a huge drop in the prices of assets and products because of a decline in demand. Deflation is the opposite of inflation. It’s a common rule of thumb that a decrease in demand results in a decrease in prices. Manufacturers do this to attract consumers. When consumers notice a downward trend in demand, they wait for the prices to drop. This further reduces demand. The continuous downward trend reduces economic activities and forces employers to lay off staff, resulting in a higher unemployment rate. The result is sluggish economic activity and a higher unemployment rate. Knock, Knock!! Guess who? Recession.

High Interest Rates

When the interest rates are high, it becomes difficult for consumers to collect loans. This directly affects how they spend. In such situations, people tend to cut their expenses, especially on major items. Similarly, companies will cut expenses to minimize their growth plan as financing becomes too expensive.

Consumers' Confidence

When consumers are not sure about the current state of the economy, they tend to spend more cautiously and save what they can in case things go south. That being said, consumer spending contributes approximately 70% to the GDP. Therefore, a significant reduction in consumer spending will substantially slow the economy.

How Long Do Recessions Last?

We’ve experienced cycles of recession, and we know what it feels like – consumers typically feel a recession even before the NBER makes the declaration.

Recessions that spawn from financial crises are usually the most complicated and the hardest to come out from. Companies, businesses, and consumers must first get rid of bad loans before they can start spending or investing, which can delay recovery.

Recessions usually last between three and nine months. This is a long time since the economy is really slowed down. The last recession we witnessed was in 2020, during the peak of the COVID-19 pandemic. No one wants an extended period of unemployment; however, it’s best to be prepared. How do you prepare for a recession? The most important thing is evaluating your purchases and creating an emergency fund.

How to Survive a Recession

When it comes down to it, you don't have to beat yourself up if the recession catches you off-guard.

There are several things you can do to survive the recession. It can be challenging managing your expenses when in a recession; that’s why you need to keep calm and focus on your goals. There are three main tips to survive a recession. These tips are more or less habits we all have. However, grooming and controlling these habits is the most effective way to survive a recession. To survive a recession, you must:

  • Manage your debts

  • Make a spending plan

  • Manage your investment and savings

These are the best strategies to survive a recession, and you need to figure out how to balance them. Also, keep in mind that the recession will eventually end. When the recession ends and the economy is back to normal, you will find these strategies continue to be helpful.

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