What happens after a recession?
An economic recession can be life-changing, with job losses, tanking investments, and failed businesses often caught in the path of destruction. However, what happens after a recession, and is it always bad?
A recession doesn’t have to be a crisis. It’s a natural part of the business cycle and what comes after a recession can be the start of limitless opportunities.
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The economic cycle
The National Bureau of Economic Research (NBER) defines the economic cycle in terms of peaks and troughs. A recession is when the economy declines from peak to trough. What comes after a recession depends on who you ask: officially, the economy goes back into the expansion phase when a recession ends. However, many economists add a period of recovery – the initial period post-recession when the economy starts growing again but is still short of its previous level.
Demographer, historian and economist Neil Howe developed his model of both the economic and human cycles. According to Neil, there are four turnings of history identifiable throughout the course of time:
(Culminating in) a crisis
Both of these models take a long-term view. Remembering that humanity existed in the past and will rise again in the future will give you some perspective and help you avoid society’s prevalent fear of recession.
How long do recessions last?
The good news is that recessions typically don’t last that long. History shows that they can be as short as two months or as long as 18 months, with an average of around ten months. One example of a prolonged recession is The Great Recession of 2008, which ran between 2007 and 2009, officially lasting 18 months. On the other hand, the recession during the global Covid-19 pandemic lasted just two months (March and April 2020) and is the shortest on record.
Ten months can feel like an eternity for those directly affected by job losses, business closures, inflation and low consumer spending. Preparing for what happens after a recession mitigates some of these adverse effects, which is why investors and business owners should always look at the bigger picture. It’s not all doom and gloom – businesses can and do thrive in a recession.
What marks the end of a recession?
The official end of a recession is when the economy starts growing again, but this doesn’t necessarily mean that the market is back to normal. Many economists believe a recession isn’t finished until the economy approaches its pre-recession GDP and unemployment levels. They refer to this period as the “recovery period.”
This is the view held by billionaire investor Warren Buffett. During the post-recession recovery in 2010, Buffett told CNBC, “I think we’re in a recession until real per capita GDP gets back up to where it was before. On any common-sense definition, the average American is below where he was before, or his family, in terms of real income, GDP.”
Buffett takes a more humanistic approach to looking at what comes after a recession. It can take months or years for the economy to return to where it was before, and during that time, many people are still struggling in the aftermath and feeling the ongoing impact.
What happens after a recession?
As a business owner, surviving a recession can be challenging, and statistics show that many businesses fold during an economic downturn. However, some of history’s most successful brands started during a recession and thrived in the aftermath. Although it may seem counterintuitive, the effects of economic recession can often lead to positive outcomes, allowing shrewd investors, entrepreneurs, and business owners to capitalize.
Although economic growth and wage increases seem like good things, unchecked growth leads to imbalances and inflation. A recession helps costs return to normal and lower inflation rates. In addition, other types of recessions can correct imbalances in investments, which happened during the housing bubble of 2008 and the dot-com bubble of the early 2000s. While painful for many, these necessary resets can repair the economy’s foundation.
Recessions can be positive for investors, but they can still cause total panic, with financial markets crashing and stocks losing value. However, investors who take a long-term perspective know that a recession is a great time to buy undervalued assets.
Stocks often lose some value during a downturn, but history shows that the market always bounces back, and stocks regain – and often exceed – their prior value. Buying additional shares at low values also helps with dollar cost averaging and breaking even on an investment.
Lower interest rates
A hike in interest rates often precedes a recession as governments attempt to control inflation, but what happens after a recession? First, interest rates will likely go back down, presenting a good investment opportunity. Then, when interest rates are low, the housing market tends to thrive, which is a good time for businesses to reevaluate their borrowing.
The hunt for recession-proof jobs always increases during economic downturns. Unfortunately, business owners sometimes make costly mistakes when they should be looking for opportunities during a recession. Starting a business during a recession is about finding your X factor – what can you contribute during this time that no one else can? Existing companies can benefit by looking for opportunities to increase their efficiencies and pushing forward when competitors pull back.
A mindset reset
One of the biggest personal opportunities during a recession is reevaluating your mindset. Certainty is one of our deepest human needs, and when we’re unsure about the future, we naturally feel a sense of fear. A recession teaches us how to turn obstacles into opportunities and allows us to reset our minds, reprioritize our lives and truly prepare for what happens after a recession: regrowth.
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