Demystifying recession

MANILA, Philippines - The term “recession” simply signifies the slowdown or downturn of the economy or economic activities spread across the country. It usually lasts for more than a few months. During recession, corporations face numerous economic uncertainties and a liquidity crunch, thereby leading them to face further chaos in the market.

Recession is more explicitly defined as the decline in the country’s Gross Domestic Product (GDP) or a negative real economic growth for two or more consecutive quarters in a year.

An economy that grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for six to 10 years and tends to go into a recession for about six months to two years. It takes place when consumers lose confidence in the growth of the economy and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, layoffs and a sharp rise in unemployment.

Recession is caused by events that affect specific industries or companies. For instance, a particular innovation might affect some related firms adversely, resulting in reduction of the products. And this would in turn lead to retrenchment of workers. On the contrary, companies or firms that are positively affected would need additional workers and lead them to hiring.

The general known reasons for recession in any economy are increase in the interest rates, reduction in the output by firms resulting in workers’ layoff, leading to a further decline in demand, causing the slowdown of the economy further.

A rise in the rate of unemployment is pretty much visible in the recessionary stage of an economy. The percentage of work that companies used to get done by outside sources is now performed by them. One of the key challenges management faces — particularly in times of economic crisis — is how to get the most out of limited staff resources. Many companies freeze hiring, limit pay raises and even lay off.

The stock markets reflect the buoyancy of the economy. Plunging stock markets are the worst happenings that take place during a recession. The need for money encourages people to sell their acquired stakes and percentages, which pulls down the stock market.

The fear of a recession looms over all the countries of the world. Whenever the US sneezes, the world catches a cold. This is evident from the way markets crashed around the world, taking a cue from a probable recession in the US and a global economic slowdown.

The largest, most aggressive Central Bank and fiscal easing program in the world is in China. It is above 20 percent of its GDP. The US is around 14 percent, the European Union around nine percent both in terms of the Central Bank plus the fiscal stimulus. The UK is around five to six percent of GDP. The rest of Asia is around three to four percent of GDP. Therefore, there is a combined element to this — China first, the US second and the Europe third in terms of the stimulus — so it is global.

Economically speaking, Mark A. Gottfredson, author and also partner in Bain & Co. Inc., also discussed the four timeless concepts that work both in the boom as well in the downturn of an economy. He affirms that performance improvement and diagnostic laws will identify the key imperatives for surviving the downturn and for gaining advantage as the market turns back up.

• Costs and prices always decline.

• Competitive position determines options.

• Customers and profit pools don’t stand still.

• Simplicity gets results.

Organizations are forced to take a deep holistic view of their overall performance and also review their objectives, rather than just following the policy of shedding their assets and the cost-cutting approach. This corrective measure-adopting exercise is also helpful in getting the firm once again in the best shape to perform and compete.

Recession impacts nearly everyone directly or indirectly, from the wealthiest people to the common man in the economy. A global recession such as the one we all are suffering today is not easy for everyone. Some companies will not survive since sloppy business practices only work in good and prosperous times. The half-full glass can thus be seen as a time of opportunity for the survivor who applies high performance practice. On the other side of the recession, survivors will be in good form and also have to face less competition.

Thus, due to loss of jobs, retrenched employees undergo a negative monthly cash flow and are not able to pay back mortgages.

To avoid the impact of financial distress in the economy, it is advisable to take a few measures that provide an edge. A carefully thought-out plan should be chalked out employing both strategic and tactical plans to cope with the slowdown crisis. All the cash inflows and outflow figures should be dotted monthly. A broad-spectrum emergency fund resource needs to be identified in order to combat economic woes. A recent live example is the declaration of the $1 trillion fund at the G-20 Summit held in England last March, released for the relief of the global recession. That amount is to be spent on restoring credit, growth and jobs, as well as measures clamping down on tax havens and a commitment to build a green and sustainable economy.

People should look at a recession from different perspectives. A recession rectifies economic imbalances and facilitates its improvement. Although this may be temporarily unfortunate, a recession helps to remove the filth of the system and pave the way for subsequent expansion. Smaller businesses may suffer great losses while strong ones are forced to generate a more efficient approach in developing and creating better merchandise. It may be unfortunate to lose a job, but it is necessary for the economy to revitalize its course.        

A consistent, well-balanced investment portfolio should be maintained in order to avoid any stage of negative cash inflow. Income resources should be diversified; this means identification of more than one resource outlet to gain monetary support. And the last resort would be to compromise our lifestyles. Preparation for a recession will enable us to react to changing times and take advantage of select opportunities.