Recessions: The meaning and the effects

Recessions_ Blog

Despite all of the excitements of the year 2020 ahead, unfortunately, South Africa starts this year and the decade ahead in a poor financial state. This comes after the announcement that the South African economy has fallen into a recession. Following this then, the most important question to answer is what a recession is, as well as to understand its effects and implications for the ordinary citizen of South Africa.

What is a recession?

For the benefit of the layman, a recession is when a country’s economy takes a decline for 2 consecutive quarters. The reason South Africa has been declared to be in a recession is because we have seen the decline in economic performance of 1.4% in late 2019 and a 0.8% drop in the beginning of 2020.

To drive the understanding of what it means to be in a recession, think about a high school student in grade 10. Let’s say this student we are talking about obtained an academic performance average of 80% in their final, fourth term grade 9 report in order to progress to grade 10. When this student gets to grade 10, as we all know, they will write tests and assessments for their first term. The first term is usually in the first quarter of the year, January to March. Let’s say the student, after writing their tests and assessments for the first term, now gets an academic average of 75%. As it can clearly be seen, the student has had a decline of 5% in their academic performance from the previous grade 9 final report average of 80%. This will be the first red flag for the student regarding their performance.

Now let’s move on to the second term of the student’s academic year. The second term is usually in the second quarter of the year, April to June. In this second term, the student will write their June exams. Let’s say the student, after writing their June exams, gets an academic average of 60%. Again here, we can see that the student has had a 15% decline in their academic performance from the previous 75% that they obtained in their first term of grade 10. This will be the second red flag for the student regarding their performance.

Since we have two red flags of declining academic performance, 80% to 75% and 75% to 60%, we can officially say that the student is having an academic performance recession. If we think of the student being the South African economy, we will say that the economy is experiencing a recession.

What are the implications of a recession?

Generally, the combined effect of a recession lowers the ordinary person’s standard of living.

During a recession, there’s a trend drop in the consumer market. This is because people’s consumption rate, meaning the use of goods and services by households, decreases. As people and households cut down on their spending and with the low rate of consumption, companies are also affected. These companies are forced to let go of their employees to cut down costs. This cutting down on costs by companies is due to the low demand of certain company products and services. The low demand of these goods and services means companies will need to produce less of them otherwise they will make a loss. Since fewer people are required to produce fewer products, that is why in the end people are retrenched by the companies they work for.

 

As one can clearly guess, retrenchments by companies during a recession will result in a sudden increase in the already high unemployment rate of South Africa. With the sudden increase in the unemployment rate more families find themselves with fewer or no income streams. This loss in an income stream by families, especially those that do not have an emergency fund saved up, makes them take up more debt in order to survive.

 

In order to take advantage of the need by people to take on more debt to survive during a recession, banks usually lower their interest rates to encourage more people to take on loans. Instead of taking up more debt needlessly during a recession however, only do it when it’s absolutely necessary, you can rather choose instead to take advantage of the low interest rates offered by banks to pay off existing debts quicker and boost you credit score in the process.

 

In terms of investments during a recession, the stock market slumps because of the drop in individual stock prices of listed companies. To be on the safe side as an investor, it is wiser to keep a balance of investments in both equity and bond funds. With regards to equity investments, less risky investments are in those companies that supply the bare necessities and money markets. The reason for this is that, regardless of financial growth, people don’t cut down on spending money for their basic needs. Real estate investing might be also a good idea during a tough economic crisis because, in a bid to get lower costing housing, house prices drop and you are likely to get great properties at lower than usual prices.

 

 

In conclusion

Although the picture painted by the effects of a recession can be considered bad, these effects can be minimised if people make more careful choices with their money. And with the right investments, you can find yourself making more money when the rest of the country is financially strained.

 

This article was written by Karabo Rantho.

You can contact Karabo Rantho by clicking on the social media buttons below, or by emailing her on: karabor@afrikakesho.co.za.

 

 

 

 

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