Recession 2020 – are we entering a new economic recession this year?
In short, my position is yes; I believe we are currently experiencing the beginnings of a new economic recession and for the remainder of this article, I shall refer to this event as ‘recession 2020’.
By looking at 3 economic factors listed below, I will explain why I personally believe we are in the beginning stages of recession 2020:
- Households
- Businesses
- Governments
For those that would prefer to watch a video regarding this subject, please watch my in-depth presentation below:
Ultimately, I write this article as I see what I believe to be unrealistic expectations about the economic outlook in the months and years to come. As such, business owners and executives may make costly decisions anticipating a ‘v-shaped’ recovery that may never come.
I hope that the points raised in this article help you better understand the challenging environment that we face so that you may make better decisions to weather and or profit even from recession 2020.
But quickly, what is an economic recession?
Recession 2020 will experience the same symptoms as all prior recessions, therefore to better prepare yourself and your business, you need to have a strong understanding of what a recession is exactly.
To be concise, a recession is the declining performance of an entire economy over an extended period of time, typically several months (some economists and government institutions state that the economic decline must carry on for at least 2 consecutive quarters in a given year).
But, how do we know that an economy is experiencing a decline in performance?
Based on the factors listed above, there are many different metrics that can be monitored to gauge the performance of an economy over a given period of time.
I have listed a few of the key metrics that I feel indicate that we are in the midst of recession 2020 under each of the 3 x economic factors and will then proceed to explain their current status.
Metrics we can follow to help us determine if we are in a recession:
If you wish to learn more about each metric and how they correspond to all recessions and depressions, including recession 2020, please click on each term below.
- Households
- Businesses
- Governments
Let’s first look at households and how they’re currently indicating we’re in recession 2020
We’ll first dive in with the number of unemployed people in the USA. This is highlighted in the interactive chart below.
Why do we monitor this metric?
If unemployment is too high, there will be many households with little to no income. This effectively means people must prioritize their spending on essential goods only such as food, and their demand for non-essential goods such as cars, electronics and so on will drop.
Naturally, a drop in consumer demand for any business is a negative attribute subsequently associated with a decline in revenue and profit from sales (less shoppers buying!).
source: tradingeconomics.com
Unemployment in the USA has risen more than 230% between March and April 2020
Figure 1 shows that unemployment in the USA has dramatically increased as a result of their Government’s lockdown measures brought about by the Coronavirus Pandemic (see the huge growth of the blue line at the far right of the graph).
Remember the recession of 2007 – 2012? The unemployment figures are mild in comparison to Q1 of 2020.
Although the lock downs brought about by Corona has triggered these extreme unemployment figures, this is not the actual reason why people are losing their jobs.
People are being furloughed or completely terminated because their employers realize that consumer demand is dropping significantly (due to being forced to stay home and generally being in a state of fear), therefore, businesses will see reduced sales and profit margins.
Employers are forced to take corrective action in order to balance their operational costs with the lower levels of income they’re generating through sales. Some businesses have very limited cash reserves also and cannot weather months of such declining consumer demand without making drastic cuts.
And it is not like the newly unemployed can go source new work easily; businesses globally are reducing their costs collectively and are therefore not in a position to hire new employees!
Unfortunately, as unemployment data for May and subsequent months begins to materialize, I fear the number of unemployed will only rise further exacerbating the situation.
Ultimately, as unemployment continues to grow, there will be less and less people in the market that can afford to buy the goods and services of businesses, and this is why it is such an important metric for recession 2020.
Unemployment is not just rising in the USA, it’s a global pattern.
Figures 2 – 5 show the growth in the number of unemployed across the UK, Australia, Hong Kong and Canada. The world has never seen such high unemployment concentrated in so many countries at one given time.
Unemployment within households is a major contributing factor to recession 2020, of which, I’ve quickly summarized why below:
- Unemployment means household income decreases or disappears altogether
- As a result, households to scale back or stop buying the goods and services of businesses
- Households that have excessive debts begin to default and miss their repayments placing strain on the banking system
Let’s now take a at businesses and how they’re indicating that we’re in recession 2020
Let’s look at the number of businesses filing for bankruptcy in the USA. This is highlighted in the interactive chart below.
source: tradingeconomics.com
The number of bankruptcies filed in a given nation is an important metric regarding the vibrancy of an economy. If a large number of businesses begin to file for bankruptcy, it is most likely due to financial constraints meaning it is no longer profitable to stay open for business.
We typically see the number of bankruptcies rise once we enter a recessionary period. Figure 6 shows the growth of bankruptcies over the first quarter of 2020 coinciding with the spread of Corona and lock down measures.
As it takes more time for businesses to file for bankruptcy than it does to terminate employees, we can safely assume this figure will continue to rise as recession 2020 continues to unfold. If we look at figure 7, it shows the number of bankruptcies during the last recession.
Why do the number of bankruptcies in a given economy matter?
A few of the consequences of a business going bankrupt are listed below:
- Businesses leading to bankruptcy usually terminate employees and reduce expenditure with other suppliers and creditors which is a deflationary act amongst itself.
- Businesses that go bankrupt and that are unable to restructure their operations may have to terminate all of their employees (contributing to unemployment numbers detailed already above).
- A bankrupt business will not be able to continue their growth and expansion, therefore they will stop investing in new ventures and assets. Effectively, no new jobs are being created as the number of bankruptcies begin to grow.
Again, bankruptcies are not just growing in the USA, it is a trend we are seeing globally at the same time.
Finally, let’s look at governments and how they’re currently indicating we’re in recession 2020
A government’s ability to operate well is directly linked to the gross domestic product (GDP) of that nation. GDP is the ‘íncome’ for a particular country (an equivalent analogy would be to compare it to the income for any given household).
If we therefore reduce GDP, we are in effect lowering the income for that country. And as such, the government will have less money to spend on:
- Government employees
- Military expenditure
- Public infrastructure and projects
A government makes their GDP / income from a number of sources, but the main contributing factors are:
- Tax revenues from households and businesses
- Charges associated with the use of public infrastructure
As we have already shown, household income globally is continuing to decline due to the mass waves of unemployment. The mass unemployment is tied to the reducing revenue and profit margins of businesses, which finally means that there are less revenues for governments to tax!
In addition, travel and transport restrictions are impeding global trade, a significant source of revenue for the government also.
We can see GDP for the United States in the chart below:
source: tradingeconomics.com
Figure 8 shows the dramatic drop in GDP during the first quarter of 2020. Figures 9 through to 12 highlight how this is a trend facing governments globally.
Why does declining global GDP mean we’re entering recession 2020?
As I touched on above, declining GDP essentially indicates that a nation’s economy is not doing well. Short periods of declining GDP are relatively frequent and have many causes, however, it is a sustained period of declining GDP that is most worrisome.
During challenging periods such as economic recessions and wars, Governments will try to energize their economy by increasing military and public infrastructure investments (thus putting more money into the hands of businesses and employees down the line).
However, as GDP continues to decline, it becomes harder and harder for a government to maintain this level of financial spending without devaluing their currency and creating political turmoil within their nation.
But wait, surely as the lock downs come to an end, everything will just go back to normal?
Unfortunately, I do not believe that will be the case.
Although we will see an uptick in performance across many economic metrics and indicators, to reach the levels of 2019 will be unlikely; we can ask a few fundamental questions to explain why this is the case.
Who will hire all the newly unemployed?
A closed business cannot just restart, it requires capital in order to do so. As many small-to-medium businesses are closing down corresponding to rising bankruptcies, there are fewer businesses with the capacity to hire the masses of unemployed.
As more businesses close, and less households can afford to buy goods and services, there are fewer transactions within an economy for a government to tax.
They too cannot afford to hire the newly unemployed given that they will be under pressure to make significant budgetary cuts, and scale back on future military and public infrastructure investments to be in-line with their declining GDP.
“I’ve heard there’s going to be a recession; I’ve decided not to participate.”
Walt Disney – Co-Founder of Disney
Conclusion
I believe we are in recession 2020; however, as wisely stated by Walt Disney, this does not mean we have to fold our cards. We can better navigate the storm if we know what to expect in the coming months and years, mainly being that:
- Global consumer demand will drop for many sectors
- Businesses will continue to close, merge or be acquired
- Overvalued asset classes such as property and stocks may fall
- Government spending will decrease and taxes may rise to compensate for the decline in GDP
But, depending on your perspective, this equally creates opportunities for those that search for it.
Some of the world’s most recognizable brands started or excelled during recessions and depressions:
- General Electric – 1892
- General Motors – 1908
- IBM – 1911
- Disney – 1929
- HP – 1939
- Microsoft – 1975
I have developed a number of supporting articles that I will link to below that may shed some helpful light in terms of decreasing costs, increasing sales and fattening profit margins:
Recession proof your business in 5 savvy ways
Driving sales with company values and 3 effective steps
How to increase sales quickly and consistently using the sales revenue formula
Increase profit with 1 powerful teaching session
If you would like more hands on advice to prepare your business for recession 2020, please do not hesitate to book a call today.
