The world has seen four major global recessions in recent decades. From the post-war recession of the ’70s to the dot-com crash of 2001 and the Great Recession of 2007-2009, these downturns have had a significant impact on economies and businesses around the world.
What is a recession? Traditionally, it is defined as two consecutive quarters of negative economic growth. However, there are other factors to consider when determining whether an economy is in recession, such as unemployment levels, inflation, and consumer confidence.
In this article, we will explore the different types of recessions, their causes, and how they can impact businesses and consumers.
Recession 101: Everything You Need to Know
As mentioned, recessions are characterized by negative economic growth. Recessions are declared by the National Bureau of Economic Research (NBER), a nonprofit research organization in the United States. The NBER looks at factors such as GDP, employment, industrial production, and retail sales when making its determination.
There are three types of recessions:
- Cyclical recessions are caused by the natural business cycle. They occur when there is a slowdown in economic activity, usually as a result of decreased consumer demand or investment.
- Structural recessions are caused by changes in the structure of the economy, such as a decline in a particular sector or industry.
- Demand-deficient recessions are caused by a shortfall in consumer demand. This can be due to a number of factors, such as high levels of debt, falling wages, or rising unemployment.
Recessions can have a significant impact on businesses and consumers. For businesses, a recession can lead to decreased sales, layoffs, and bankruptcy. For consumers, a recession can lead to decreased spending, higher unemployment, and debt.
Why Should You Know About Recessions?
In times of economic recession, a number of things can happen that can impact your business. Your customers may have less money to spend, so you may see a decline in sales. If you hire contractors, you may see higher figures when generating 1099 forms.
You may also see an increase in bad debt as consumers struggle to pay their bills due to their own low paystubs. And, if the recession lasts long enough, you may see a decline in the value of your business as well.
This is why it’s important to be aware of the signs of a recession and to have a plan in place to deal with them, like an emergency fund. By knowing what to expect, you can make sure your business is as prepared as possible for whatever may come.
What Causes a Recession?
Because recessions are so long-lasting, they are often a sign of a larger problem with the economy. There are a number of factors that can contribute to a recession, including:
- Decreased consumer demand – When consumers have less money to spend, they will buy fewer goods and services. This can lead to decreased sales for businesses and layoffs for workers.
- High levels of debt – In times of geopolitical tension or economic strive, banks, countries, and other large entities find themselves with too much debt. Individuals and businesses can also find themselves struggling with too much debt. This can lead to a decrease in consumer demand as people struggle to pay their bills.
- Falling wages – There have been a number of points in history where wages have fallen while the cost of living continues to rise. Situations like this can lead to a decrease in consumer demand as people have less money to spend.
- Rising unemployment – People can’t spend money if they don’t have a job. When unemployment rises, it can lead to a decrease in consumer demand and an overall slowdown in the economy.
- Geopolitical tension – Tensions between countries can lead to investors pulling their money out of certain economies, which can lead to a recession.
- Economic strife – Struggling economies can also lead to a recession. For example, if a country has high levels of inflation, this can lead to a decrease in consumer demand.
Are We Experiencing a Recession in 2022?
Thankfully, we are not experiencing a global recession in 2022 – but you would be forgiven for assuming so, given the events of the past few years. The COVID-19 lockdowns and restrictions imposed in 2020 saw every major economy on the planet take a significant hit.
This recession, referred to as the COVID-19 Recession, lasted for the best part of two years as global spending plummeted and businesses closed their doors. It was the deepest and longest-lasting recession since World War II, with experts warning that it could take up to a decade for some economies to recover.
However, while the COVID-19 Recession was incredibly damaging, most economies have recovered as of April 2022. The U.S. is still predicted to see a recession some time over the next several years, as it has done ten times since 1945, but it is not currently experiencing one.
Wrap-Up: Recession-Proofing Your Business
Hopefully, this article has shed light on what the recession is and how it may affect your business. The economy is often a volatile beast, and it’s hard to predict when or how it will strike. However, there are steps you can take to help recession-proof your business:
1. Diversify your income stream. Don’t put all your eggs in one basket. If your business is reliant on a few big clients, and those clients go belly-up, you could be in trouble. Try to spread your income across a variety of sources.
2. Keep your costs low. This is a no-brainer, but it’s especially important in a recession. Find ways to reduce your overhead costs, like generating W-2 forms for free, and pass those savings on to your customers.
3. Stay nimble. When the economy takes a turn for the worse, businesses that are able to quickly adapt are more likely to survive. Be prepared to make changes to your business model, as needed.
4. Keep a positive attitude. This one may be the most important of all. A positive attitude will help you weather the storm, no matter what the economy throws your way.
The recession is a reality that businesses must face. However, by following the tips above, you can help to minimize its impact on your business.