Recession risks await, but don’t panic

Around the world, warning signs of a recession are constantly appearing.

America is an example. The US stock market has fluctuated in recent times in the context that the Federal Reserve (Fed) and global central banks are stepping up tightening monetary policy, most commonly raising interest rates, to lower interest rates. inflation rate escalated. And geopolitical tensions are exacerbating the supply chain crisis, which began with the Covid-19 outbreak in 2020.

“We’re going to enter a severe recession,” economists at Deutsche Bank warned last month, predicting a bear market for US stocks. Bank of America said investor sentiment in financial markets is very low. Goldman Sachs is one of the few units with an optimistic outlook, however, they also said that the strong labor market “contributes to increasing recession risks”.

Meanwhile, the Bank of England warned on May 5 that the country could face a “double disaster” with inflation rising to double-digit thresholds and the economy entering a recession. The agency was forced to raise interest rates by 0.25%.

China, the world’s second largest economy, is “shaken”, and threatens to drag down global growth. And the Russian-Ukrainian conflict caused food and energy prices to skyrocket in Europe and other parts of the world.

If history is taken as a reference, the escalation of inflation is a warning sign that the economy will soon fall into a recession. With only one exception, every recession in the United States since World War II has followed a period of high commodity prices, according to the US Congressional Research Service.

So, what is a recession? And should you worry too much about it? Let’s find out together.

What is recession?

Recession: A recession is a period of prolonged economic contraction. A recession is usually defined by the fact that the economy shrinks for two consecutive quarters, usually measured by gross domestic product (GDP) growth.

The effects of the recession are felt across the economy, with unemployment rates rising, stock markets falling, the economy slowing, and worker wages falling. People often limit spending in the context of the economic crisis, making this situation even more serious.

For example, the recession that started in 2007 lasted only 18 months, but its impact on consumers was long-lasting.

Economists call that lingering effect, particularly on the labor market, the “latency phenomenon”. The recession in 2020 will not last long, but the long layoffs or layoffs of workers, along with the trend of shifting to remote work, have completely changed previous notions. value and meaning of work. Around the world, workers’ dissatisfaction with their employers has led to a high rate of resignations, a phenomenon many refer to as the “Great Leave”.

The Fed was unable to anticipate the evolution of inflation, leading to action too late. Photo: Reuters.

What is the cause of the recession?

This is a question that takes a long time to answer. But let’s focus on the biggest risk right now: the Fed’s fight against inflation.

One of the “habits” of the modern capitalist system is that when the economy grows too fast, the authorities will “deliberately” slow down this process to be able to “take the reins”. it. This is especially true of the US and what the Fed is doing.

On May 4, the Fed officially raised interest rates by 0.5%, the strongest increase of this organization after 22 years. Interest rates are the Fed’s basic tool to control inflation, currently at 8.5%, the highest in more than 40 years.

But forecasting economic growth or contraction is not easy, and the Fed is not a “good student” in this “subject”. When it is not possible to recognize “the economy is growing too hot,” the Fed’s remaining job becomes extremely complicated.

This agency is forced to raise interest rates high enough to reduce inflation. if overdoing, consumer demand will decrease, dragging the economy into recession. And if it’s not done enough, commodity prices will continue to rise, and recession will be the end result.

An outcome of least impact is what many people want, whereby consumer prices fall while the economy continues to grow steadily.

What should we prepare?

First, we shouldn’t panic: Even if a recession is inevitable, we don’t yet know how severe it will be. But it will never be superfluous if we are well prepared. Here are some tips from financial experts to help you preserve your wealth.

Find yourself a new job and stick with it: In the context of low unemployment rate and many job opportunities are opened, the current job market is extremely favorable. But the situation will change very quickly when the economy enters a recession.

Take advantage of the housing craze: If you’ve been wondering whether to sell your home, now is the perfect time. Home prices in the US are up nearly 20% in the past year, but now that mortgage rates are on the rise, too, will dampen demand.

Save some cash: Owning highly liquid assets like cash is always a good idea, to solve urgent needs.

And finally, advice for investors: Don’t let your emotions overwhelm your reason. “Invest and follow your investment philosophy,” says expert Mari Adam. “History shows that what we think about the market is incorrect. The best way to achieve your long-term goals is to keep investing and not falter.”

According to Trong Dai