Did you know that the world lost around $9 trillion in global GDP during the pandemic in 2020?
With lockdowns coming into effect around the world, the global economy came to an absolute standstill. Within a few months, the world saw trillions of dollars disappear through one of the biggest recessions in modern history.
This unprecedented economic situation left many people asking, how long does a recession last? While there is no simple answer to this, it can help to take a closer look at what an economic recession is, how it affects the global economy, and how long previous recessions lasted.
Interested in learning how long do recessions last? You’re in the right place. Here’s everything you need to know about economic recessions along with how long does a recession last.
What Is a Recession?
A recession can be broadly defined as a significant downturn in economic activity. The reason this is a broad definition is that many economists have slightly different definitions of what a recession is. While some of these definitions are politically motivated, the most popular metric to measure a recession is two quarters of economic reduction.
This is an important concept to understand as economic activity can fluctuate from time to time and that would be completely normal. This can be industry specific or an effect of the general economy. A great example of this could be seen within the Christmas tree industry.
While Christmas tree sales are strong in November and December, they take a downward turn for quite a few consecutive months until the Christmas season begins again.
This is why economists don’t look at specific industries or seasonal effects that may have an effect on more than one industry. Most economists would agree that an economic recession is when the entire economy shrinks for two quarters in a row.
This does not mean that the economy has to shrink for all six months, but the economy should be continuously shrinking in a widespread and consistent manner over two quarters.
What Causes a Recession?
There are several economic factors that can cause a recession. These factors can influence a specific industry before having a widespread effect on the entire economy. Here are a few of the most common causes of a recession.
1. Confidence in the Economy
One of the most common causes of a recession is the lack of confidence in the market. This is generally when the stock market crashes, resulting in a recession throughout the economy. When people stop buying securities on the stock market, prices begin to fall, leading to widespread panic and even lower prices.
These securities are not just stocks but also bonds and commodities. This means that the price for essential raw materials can fluctuate, having a massive impact on the general economy as well. This showcases the deep link between the stock market and the rest of the economy.
2. Higher Interest Rates
The interest rates published by the Federal Reserve are a good indicator of how the economy is going. The Federal Reserve has the right to raise interest rates to slow down the money supply. This can help combat inflation and protect the value of the dollar around the world.
While this can help strengthen the dollar, it can also slow down customer demand as it means that there is less money in the economy to spend. This results in a decrease in consumer demand and less overall economic activity.
3. Asset Bubbles
Asset bubbles are one of the most popular reasons for recessions. Asset bubbles are when the price of an investment rises beyond a reasonable value. This can apply to assets such as stocks on the stock market but also physical assets such as the price of housing and gold.
This is possible because of the fact that many of these assets get their value from public perception. Especially in the stock market, the more people want a stock, the higher the price is. This is true even if the underlying asset has no tangible value.
Cryptocurrencies such as Bitcoin and Ethereum face constant criticism from economists and investors because of this fact. This is why many people consider the cryptocurrency industry one of the biggest asset bubbles in modern history.
Once these bubbles burst, money is lost almost instantly. This results in less liquidity in the economy and a massive reduction in economic activity because of it.
4. Consumer Demand
Consumer demand is an important metric to determine whether we are in a recession. This is because as people remain active within the economy, more money is circulated. This activity is what determines manufacturing demand to complete the cycle of money.
Consumers are often the last link in the chain. However, they are also the most important component of the system. This means that once people stop spending money, the entire supply chain crumbles.
This can result in resources and assets being discarded or wasted as the economy adjusts to the new demand levels. In simple terms, manufacturers will need to downsize to remain profitable in the new, smaller economy.
5. Credit Crunches
A credit crunch is when banks and financial institutions reduce the amount of credit that they offer the public. This generally occurs when the banks find themselves offering too much credit at any given time. The most popular instance of this happening was back in 2008 when banks realized that they had given out more mortgages than they should have.
When banks and financial institutions find themselves in this position, they quickly stop issuing new credit. This means that the flow of money into the economy starts to slow down. Less money in the economy means that consumers don’t have as much money to spend.
While this sounds like a very rare instance, it’s more common than you may think. This is because banks are incentivized to issue as much credit as they can. Banks make most of their money from interest, highlighting their dependence on issuing new loans as often as they can.
During the 2008 financial crisis, banks were issuing mortgages to anyone that could qualify for one. This is because they were making billions from the initial mortgage fees when new homeowners qualify for the loan. This led to a massive bubble and the recession that followed.
How Long Does a Recession Last?
Not all recessions are the same. As mentioned above, recessions can be caused by several different factors. While each of these factors can place a country in recession, each factor can have a different effect on the economy.
This was evident in the most recent recession in 2020. The global pandemic resulted in lockdowns around the world, slowing down economic activity overnight. However, this factor was a result of the lockdown itself.
This meant that once the lockdown restrictions were lifted, economic activity returned. In this case, consumers were eagerly waiting to return to the economy and managed to break records as soon as restrictions eased. These levels of consumer demand helped reverse the recession in just a few months.
While the recession in 2020 was relatively short, there have been recessions that have lasted years in the past. How long a recession can last depends on the cause of the recession and how governments and other authorities respond to the economic downturn.
Recession Predictions and Indicators
The quicker economists can predict a recession, the faster policies can be implemented to help stimulate the economy. As mentioned before, the governmental response to a recession is the most important factor that helps determine how long the recession will last.
Here are a few indicators that a recession may be on the horizon.
1. Negative GDP Growth
Most economists agree that two consecutive quarters of negative GDP growth is the definition of a recession. While some may argue this, the GDP of a country is a very important indicator of how active that market is. This means that negative GDP growth is a clear sign that consumer demand is lower than it was before.
2. Unemployment Rates
The unemployment rate is another important metric to keep an eye on in any market. This is because unemployed people are generally less likely to participate in the economy since they are not generating an income. This means that the higher the unemployment rate, the lower consumer demand in that market may be.
3. Declining Margins
Declining margins are a clear indicator that businesses are not doing as well as they may have done in the past. However, businesses usually adapt to keep their profits the same. This is why you should take a closer look at their individual margins.
When evaluating a business, look at its reported sales over the last few months and compare this with its profit. If a business is bringing in less money or making a smaller profit every month, it could be an early sign of a recession.
The Economic Effects of a Recession
A recession can have a different effect on different industries and markets. In general, recessions are known to cause higher unemployment rates, lower wages, lost economic opportunities, and decreased property values.
Unemployment and Wages
A recession puts a financial toll on businesses around the world. Since there is significantly less consumer demand, businesses opt to scale back their operations to meet the current needs of the market. This often leaves many people out of work, since cutting salaries is the easiest way to reduce operational costs.
While this helps keep the business afloat, it does mean that many people may have to sacrifice their incomes and livelihood in the process.
Lost Economic Opportunities
When businesses scale back, it means that they are in cost-saving mode. This means the business is changing to meet the needs of the market and not taking on any new risks in the process. A lower risk appetite means that businesses are not investing in growing the market.
The Effect on the Housing Market
Recessions mean that there’s less disposable income in the economy. This also means that there are fewer buyers in the market looking for property. This reduction in buyers can have a real-world effect on the value of your home.
Fewer buyers mean that people who are selling their homes will have to reduce their asking prices. These lower prices can have a ripple effect on property values throughout the neighborhood. This can even reduce your property value even if you’re not selling.How Long Do Housing Markets Recessions Last?
Housing market recessions often last longer than the recession itself. This is because buying a house is a serious commitment and is something that most people wait to buy when they are in a better financial situation. This means that most people will wait to recover from the recession before slowly starting to think about buying property again.
How Long Will Recessions Last Around The World?
Different countries can experience recessions at different times. While the global market does link almost every economy in the world, some countries are better equipped to survive a recession than others. This is also dependent on what measures each country takes to help combat the recession.
For example, the United States passed major legislation in 2020 to help keep people employed during the pandemic. Other countries may not have had the finances to pass such legislation, meaning that they would have to suffer the effects of the recession for a much longer time.
The Average Recession in the United States
The United States has incredibly strong fiscal policies in place to help minimize the risk of a recession. However, the average recession in the United States since 1900 is around 15 months. While this is still a long time, it’s significantly shorter than recessions have been in the past.
Recessions are getting shorter due to advanced financial policies and a greater understanding of the market. While some attribute this to technological advancements, others say that it’s simply the evolution of the market. The global economy has never been as integrated and co-dependent as it is today, meaning that the risks are diversified around the world.
What To Do In a Recession
Recessions can put markets around the world in panic mode. This panic is often what causes the effects to worsen. Here are a few helpful tips to help you prepare for and navigate a recession.
Take Stock of Your Financials
Preparing for a recession means preparing your finances. This can help you gain a good understanding of how much money is coming in and how much money is going out every month. This can also help you budget yourself better and even highlight ways that you could save more money every month.
When looking through your income and expenses, also make sure to note your debts. Whether this is your credit card, small loan, or mortgage, you should always know how much is owed and what the monthly payments are.
Increase Your Emergency Fund
Recessions can be incredibly unpredictable. Some recessions could mean that people lose their jobs while other recessions may bring inflation that increases the cost of living. Either way, a great way to stay prepared is to build and increase your emergency fund.
Most economists and financial advisors agree that everyone should have an emergency fund of at least three full months’ salary. This is a comfortable cushion that can help you if you were to ever lose your job. Another rule of thumb is to have six months of expenses saved so that you’re not at risk of defaulting on any bills during tough economic times.
Manage Your Debt
As mentioned before, having a good understanding of your financials is a good place to start. However, debt is often the most stressful aspect of managing your finances. Recessions can make managing debt even more difficult if your income is reduced or disappears altogether.
While you should keep a few months of expenses on hand to compensate for tough times, some may advise that you get rid of debt that you otherwise don’t need. This could mean selling your car or rental property to give yourself enough wiggle room financially.
Recessions can last anywhere from a few months to a few years. Due to this, the best way to understand how long a recession will last is to look back at the most recent recessions. Here’s a quick look back at the most recent recessions and how long they lasted.
The Covid-19 Recession
The Covid-19 recession lasted from February 2020 to April 2020. This was one of the shortest recessions in modern history, lasting only a few months before massive stimulus packages arrived to save the global workforce. However, not all countries in the world were able to afford such stimulus packages, meaning that the recession lasted longer in less-wealthy countries.What Caused the Recession
This recession was fairly straightforward, with the Covid-19 pandemic to blame. The Covid-19 virus quickly spread throughout the world, with governments forced to implement lockdowns to slow the spread of the disease. These lockdown measures were incredibly controversial but were essential to save lives.
However, the cost of this was a total reduction in economic activity. In some industries, the pandemic and the recession worked well to help them grow. This is evident in the growth of the eCommerce and online-services market.
This, along with the stimulus packages, allowed the United States to bounce back in record time. How Long Did The Recession Last?
The Covid-19 Recession was one of the shortest recessions that only lasted from February to April 2020. This means that the entire recession was only felt by the American economy for just three months. However, in many other countries around the world, the recession lasted over a year.
The Current Recession
While there is still much debate on the current recession, economists around the world agree that the world is currently in one. This recession is much more subtle than the Covid-19 recession as there is no one thing that we can all blame for it. However, this recession is seeing the cost-of-living increase, and many people losing their jobs already.What Caused This Recession?
The first signs of the current recession were felt close to the announcement that Russia would invade Ukraine in February 2022. However, many economists agree that the global economy was still feeling the effects of the Covid-19 Recession.
The Covid-19 Recession saw record stimulus packages being introduced, with many saying that this influx of money would eventually lead to asset bubbles and general inflation. This is why many people think that the current recession is a direct result of earlier economic conditions.
However, the Russian invasion saw the price of oil and commodities skyrocket. This was very likely to be the final catalyst for the recession.How Long Will This Recession Last?
While nobody knows how long this recession will last, many experts predict that it would not be as quick as the Covid-19 Recession. This is because of the Russian invasion and general uncertainty around the price of commodities such as energy throughout Europe.
Covid-19 has a singular, clear obstacle to face while the current recession is a more complex and prolonged economic condition.
Recessions and the Real Estate Market
If you were wondering how long does a recession last, hopefully, you now understand how complex of a question that is. While some recessions can last a few months, others can take years for the economy to fully recover from.
Recessions can also influence the housing market, making now the perfect time to sell your home. Thinking of taking advantage of the current market to sell your home? The best way to secure a buyer for your home is through iBuyer.com.