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What is a recession and should you be worried?

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A recession is a large and widespread, prolonged downturn in the economy. Because recessions often last six months or more, a popular rule of thumb is that if there are two consecutive quarters of decline in a country’s gross domestic product (GDP), it is a recession.
Economists who, for example, date US business cycles, define a recession as an economic downturn that begins at the peak of the economy that was and ends at the bottom of the next downturn.

Low economic cycles often lead to less economic production, also that consumer demand and employment then decrease. Indicators for this are checked, for example wages outside the agricultural sector, industrial production and retail sales to be able to indicate the beginning and end of a downturn. Usually, this can only be seen several months after the peak and trough of the business cycle.
A downturn must be deep, pervasive and lasting to be labeled as a downturn, but it is specialists trained and knowledgeable in the field who make judgments after the fact and not a mathematical formula that could warn of the next downturn.

For example, the depth and widespread nature of the economic downturn caused by the 2020 COVID-19 pandemic led these professionals to label it as a recession despite its relatively short duration of two months.

Should you then be worried?
One could not exaggerate the answer to that question. As individuals, we don’t have that much influence on the economy, and likewise the economy doesn’t have too much of an effect on us. So if you follow your usual routines, there is no major danger, and Sweden as a smaller country is not that susceptible. We also have good security packages from the government that have been put in place should any major problems occur. It may even be a good time for new investments, such as buying stocks. Here are some simple steps to buy stocks that are of interest even in a down economy.

What causes a recession?

There are many theories that try to explain why and how the economy can fall from long-term growth and end up suddenly in a downturn. These theories fall into a few different categories based on economic, financial or psychological factors, and some can be said to overlap, so it’s not always easy to see.

Some economists focus on economic change, including, for example, how industries change over time as the most important factor. For example, a sharp and sustained increase in the price of oil due to a political crisis, something that we are seeing in Ukraine right now, can increase costs worldwide, while a new technology that is introduced quickly can make entire industries obsolete, and then the recession is a reasonable result in both these cases.

The 2020 COVID-19 epidemic and the public health restrictions that were put in place to prevent its spread is another clear example of an economic shock that can lead to a downturn. It may also be the case that an economic shock merely accelerates the onset of a downturn that would have occurred anyway as a result of other economic factors and ongoing imbalances.

When was the last time Sweden had a recession and what happened then?

A recession is a period of low economic activity. In Sweden, we had a recession between the years 2008 and 2010. During this period, GDP fell, unemployment increased and inflation decreased. The recession was caused by the financial crisis that started in the United States in 2007. The financial crisis led to banks having less money to lend, and this affected companies that had difficulty getting financing for their operations. This resulted in reduced demand for goods and services, and more people became unemployed.

Why it is important to understand how a recession affects

Since the Industrial Revolution, economic growth has been the rule in most countries, and economic downturns are a recurring exception to this rule. Downturns are the relatively short downward part of a so-called business cycle. This means that they often correct the economic imbalances that occurred during the previous expansion and prepare for growth to resume.

Although downturns are a common feature of the economy, they have become less common and shorter in modern times. Between 1960 and 2007, there were 122 recessions that affected 21 advanced economies. But none of these can compare to the incredible crises seen at the beginning of the 20th century.

Because downturns represent a sudden reversal of the often prevailing growth trend, the declines in economic output and employment they cause can become a kind of spiral and actually strengthen the economy. Similarly, the stock market falls that sometimes accompany a downturn can reverse the prosperity effect and reduce consumption based on rising asset values and increased net worth.

Since the Great Depression, governments around the world have adopted counter-cyclical fiscal and monetary policies to ensure that common downturns do not turn into something far more damaging to the long-term economic outlook.

Some of these stabilizers are automatic, such as increased spending on unemployment insurance that compensates for some of the lost income of laid-off workers. Others, such as interest rate cuts to promote employment and investment can be decisions that come from the government.

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  • Source: Plato Data Intelligence: Platodata.ai
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