Doom and gloom is the general media approach to a recession. Certainly, names like the Global Financial Crisis and the Great Depression do little to alleviate this negative outlook. Such periods often warrant this level of dejection – millions of people defaulting on home loans and losing jobs is hardly cherry. Nevertheless, given the current global climate - a quasi-calm before the storm - it pays to assess what the real long-term implications of a recession could be. Newsflash: it’s not all terrible. 

A recession is broadly defined as two consecutive quarters of negative economic growth (measured using GDP). I prefer Harry S Truman’s definition for its simplicity; “it’s a recession when your neighbour loses his job; it’s a depression when you lose yours”. The world cannot truly be said to have plunged into a recession under either of these definitions just yet.

Even so, inflation is on the up globally primarily due to rising food and energy prices. Europe is in perhaps the greatest danger of prolonged economic underperformance as gas and oil shortages caused by a certain Russian war have no immediate resolution in sight. Global-supply chain issues add to the problem by increasing the costs of imported goods and prolonging existing supply shortages.

In view of rising inflation, countries like the United States and New Zealand are flexing their monetary policy muscles and tightening interest rates. The American Fed is perhaps leading the way in terms of imposing this tightened grip with interest rates up more than two percentage points since the start of 2022. In New Zealand the story is very similar; predicted inflation rates as high as 7% are on the horizon and as such there will continue to be a rise in rates to combat this. 

Both lower consumer confidence resulting from inflation and reduced money supply resulting from increased interest rates will contribute to economic downturn. Though a recession is not technically here yet, it is a safe bet that it will be soon.

So, ‘where are the positives?’ I hear you ask. Well, recessions do not always catch economies cold turkey. Most recessions, as with this one, are not grand crashes like the GFC but instead a necessary evil resulting from central banks squeezing the money supply. In this way, a recession is essentially the planned-for occurrence of a contractionary monetary policy with the hopes of lowering inflation and in some cases increasing unemployment levels. 

While the prospect of increasing unemployment does not sound all too positive, it is a necessary fact of life when a country exceeds its maximum sustainable employment level. In New Zealand unemployment is the lowest it has been since the 1980s and well below maximum sustainable employment. As Mark Lister of Craig Investments has pointed out, this raises the risk of a wage-price spiral and out of control inflation. 

So, while the bull market since the GFC (not-withstanding a Covid size blip) has been highly enjoyable, it is now high-time a recessionary correction took hold to wrangle inflation back into the 1-3% sweet spot. As Nigel Lawson once said under remarkably similar circumstances, “It’s all been just a bit too much of a good thing.”

Economic indicators also reflect this almost-positive stance on recession. Though reserve banks are squeezing interest rates and a downturn seems inevitable, there is little evidence to suggest that the coming recession will feed off itself. I refer to the situation where a struggling household negatively changes its spending pattern to help ease the burden of a recession.

The Economist has pointed out recently that the bank balances of the poorest American households are 70% greater than in 2019. The story is much the same in New Zealand where bank balance sheets reached their all-time peak in June. As such, the economy is in as prepared a state as any to fall into a recessionary hold for a time. 

The European situation is not so easily discounted. Europe faces serious oil and gas shortages as Russia turns off the taps, creating an inflationary problem for industry and households. A recessionary downturn in economic activity could be seriously consequential to countries where industry is already hamstrung by high energy prices. 

The silver lining? A diminished reliance on autocratic energy-producing nations cannot be a bad thing in the long run. The Russian invasion of Ukraine has exposed many countries for being over-reliant on one energy source. This has prompted a fast-tracked clean-energy push in many European nations. Germany, which relied on Russia for the majority of its oil and natural gas, has brought forward its goal of 100% renewable power by more than a decade to 2035. 

This is a shift borne out of necessity, but nevertheless could spell the ushering in of a new era of greater reliance on renewable energies. If Europe can make this shift quickly, then a coming recession will not be so taxing on industry and households.

Michael Burry became a household name for investors and finance-bros alike for his single-handed prediction of the GFC. Today, you will be hard pressed to find an analyst not singing the likelihood of a coming recession. With good reasoning, the crack-down on inflation and slowdown of spending worldwide makes a recession almost inevitable. Nevertheless, governments are better equipped for the coming downturn and a recession could be just the antidote to deal with rising inflation.

Countries also affected by energy shortages will face the most immediate challenge amid a recessionary landscape. However, it may not be time to stock up on blankets just yet as there is a serious push worldwide to reduce reliance on unrenewable energy. Coming out the other side of a recession, the nations which made this push should find themselves better off in the long term.

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