Welcome to Cheques and Balances. I’m Michael Vincent. This is James Blair. This week we’re in the economics corner with Mike, we’re talking recessions.
The R Word – Are we in a recession?
This episode has actually come from our conversations with clients we’ve been having. Over the last few weeks, we’ve heard the R-word being mentioned in most of our phone calls. This sentiment has been exacerbated by the media noise lately heralding (no pun intended) record breaking inflation, wars overseas, interest rates increasing and that thing called COVID.
So, are we actually in a recession?
A recession is defined as two consecutive quarters of a decline in GDP growth. As of this podcast, New Zealand has only had one quarter of negative GDP growth. So no, we’re not in a recession. Yet.
What’s GDP? Gross Domestic Product is the measurement of an economy or a country’s output. We’re producing goods and someone’s buying them. That total number is either going up or down. A decline in GDP growth means it’s going up, just at a slower rate.
Are we likely heading into a recession?
Likely, and that might be a good thing. A recession is part of a normal economic cycle. A normal cycle usually lasts 5 – 7 years. Now we haven’t had a recession for quite some time and that is because the Government has been artificially propping up the market by pumping money into the economy. Since that money printing has slowed down – we aren’t making as many goods, nor buying them in the market – this is what we call a supply side shock. This means that there are factors of production that are harder to come by or more expensive, like a global pandemic that has factories, offices and most businesses grinding to a halt for a period of time.
When a market is on a bull run, or things are looking good, people get jobs, they use those jobs to get good incomes, they use that income to take out loans to buy nice things. When you have supply side shocks or when things aren’t going so well in an economy, people lose jobs, confidence in income growth drops and people generally stop taking out loans and refocus on paying down debt, this causes an economy’s growth to slow down.
Markets generally operate is 7 year cycles. There’s three good years, three boring years and one bad year. The last time we had a bad year was 2008, so if you’re any good at math, you know we’re well overdue for another one.
Why recessions might be a good thing?
As labour markets tighten, as growth slows down, companies that don’t make economic sense or have poor businesses practices will fail, similar to the natural selection theory (thanks Darwin!). That creates opportunities in the market for either established players to expand their position, or for new players to come into the industry and create new business opportunities. Economic downturns also present an opportunity for businesses to tighten up on costs, become more efficient and in turn, more profitable.
Investors play a really important role in the economy, because they allocate where they deploy their capital to grow it, which means they are looking for good returns. If they can just rely on governments pumping money into the economy constantly and artificially causing company growth, they stop making rational decisions about investing. Once the rational investing stops, investors will put money in almost anything *cough* NFT’s *cough*, you start to get a really bloated and lazy economy which shares the same characteristics as a bubble, and well, you know what happens with those.
So what should you do?
This is the time when things go on sale, stocks are down, house prices have plateaued and opportunities are plentiful. Successful people are doing a really good job of blocking out the media noise, sticking to their financial plan and continuing to purchase long term assets that compound in value over a long period of time.
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