A recession is a period when the economy declines for at least two consecutive quarters. It usually occurs as a result of shocks to the system such as high oil prices, natural disasters, pandemics, war and breakneck technological advances that change how we work and live.
When a recession hits, businesses struggle to keep their doors open and employees lose their jobs. The human cost is devastating. That’s why experts monitor the indicators of an impending recession so that we can take preemptive action to avoid one or mitigate its effects. If you are concerned about the state of our economy and want to know if another recession is coming sooner rather than later, read on for some key signs that a global recession is imminent.
The Shrinking Dollar
The dollar is an important indicator of the health of the global economy. The strength of any currency is measured against the value of other currencies. The less valuable a currency is, the more expensive it is for people to purchase goods and services in that country. That’s why the value of the dollar is so important. The strength of the dollar is indicative of how well the United States is doing economically.
The US Dollar started shrinking in value from January 2020, when the pandemic was just getting started. By June 2021, the confidence that COVID vaccines had grown and so did the US Dollar. The rise of the US Dollar Index signals that investors are gaining confidence in our country’s ability to pay its debts. That’s because the higher the value of the US Dollar, the cheaper it is for the government to pay its debt back.
Employment is a key indicator of the overall health of an economy. If people are losing their jobs, it means they don’t have the money to spend on goods and services. That leads to a decline in overall economic activity. In a healthy economy, the job market grows and more people are employed. In the 2008 financial crisis, the unemployment rate rose to 10% and millions of people lost their jobs. If this happens again, the impact on the economy would be devastating. Experts say that a 10% unemployment rate would take 10 years to recover from. If the job losses are concentrated in a particular industry or region of the country, the impact would be even worse.
Over the last year the unemployment rate has reduced in the US from 5.9% in June 2021 to 3.6% in June 2022. This is a good sign that their economy is healthy. Although when you take the rising inflation rates into consideration you might disagree with that point.
The wages people receive from their employers are a reflection of the overall health of the economy. If people are making more money, it means that businesses are thriving and the economy is growing. If wages are stagnant, it means that people are having a hard time supporting themselves. It also means that people don’t have disposable income to spend on goods and services. Stagnant wages are one of the most ominous signs of a coming recession.
When wages are not keeping up with the cost of living, it is usually because of inflationary prices on goods and services. This is currently the case globally as countries are experiencing rising inflation rates that haven’t been seen in decades.
Stock Market Collapse
The stock market is a reflection of investor confidence in the economy. When the market is doing well, investors are optimistic about the future. They are willing to take a chance on new companies and new products. If the market is doing poorly, it means that investors don’t have confidence in the future. If the market were to collapse, it would be a sign that investors are losing faith in the economy. A collapse in the stock market would have a significant impact on the economy. Investors would lose trillions of dollars in their retirement funds and would have less money to spend on goods and services.
The most recent example of a stock market crash occurred on the 20th of February 2020, when the stock markets across the world suddenly crashed after growing instability due to the COVID-19 pandemic. This ended on the 7th of April 2020.
Consumer confidence hits rock bottom
Consumer confidence is an important indicator of the overall health of the economy. If people are worried about the future, they don’t have the money to spend on goods and services. If consumer confidence suddenly plummets to record lows, it would be a sign that people are losing faith in the future of the economy. If confidence continues to drop, it would signal a major recession is coming. A sudden downturn in confidence would be a major red flag. People don’t just lose confidence overnight. There are a number of factors that lead to a decline in confidence. If you see signs that consumer confidence is waning, it may be a good idea to take action.
Most countries are experiencing a dip in their Consumer Confidence Index because of the rising cost of living and stagnant wages. Both of which can be traced back to the COVID 19 pandemic and the current Ukraine Russia War.
Commodity prices are dropping
The global economy is powered by a variety of commodities including oil, natural gas, and precious metals like silver and gold. These commodities are often called the “canary in the coal mine” because they are either a sign that a recession is coming or that an economy is growing. When commodity prices start to drop, it is a sign that demand is dropping. When demand drops, it is a sign that the economy is slowing down and a recession is on the horizon. That’s why commodity prices are important indicators of a coming recession. In the early 2000s, commodities like oil and natural gas were at record high prices.
By January 2020 the prices of commodities took a massive dip and this coincided with the COVID 19 recession. Around August/September 2020, the prices of commodities went on a rise but started falling again in February 2022 because of the ongoing war between Ukraine and Russia. One could say the likelihood of a recession is directly proportional to a fall in commodity prices.
Corporate earnings turn from profit to loss
If companies are making less money, it means that people aren’t buying their products or services. That’s a major red flag for the economy. If companies are losing money, it means that they don’t have the money to hire new employees or give their employees raises. When corporate earnings start to turn from profit to loss, it means that a recession is on the horizon.
With the global economic climate being riddled by high inflation rates, companies had to increase the prices of their services, to ensure they met their profit margins. Most companies in countries like UK are still struggling to deliver services even with inflated prices, and this isn’t because they didn’t have money to recruit people. On the contrary, they were struggling because they can’t find people to recruit.
For example, the UK aviation and healthcare industry were hit the hardest in terms of workforce shortage. The government were able to address the shortage in the healthcare sector by opening the UK border and extending work visas to immigrants. The aviation sector hasn’t been so lucky. Several flights have been cancelled across UK because of staff shortages at airports like Heathrow and Gatwick.
While a recession will always be defined by an economy shrinking two quarters in row, there are signs that lead up to this, which you can watch out for.
It is important to note that not all of these signs need to manifest before a recession occurs. Some signs are more sudden than others, like the stock market can crash without giving any warning. Other signs are gradual like Consumer confidence, rising inflation and wage stagnation.
In this current economic climate, our biggest threat to recession is the rising inflation rates which have been aggravated by the Ukraine Russia War. As it stands, if countries worldwide can’t control their rising inflation, people will stop buying and selling. This will eventually lead to the economy shrinking and recession.