Are Recessions a Necessary Evil?

When the media and opposition benches bang the drums of recession, it can feel like the four horsemen of the apocalypse have arrived. Contrary to tabloid clickbait recessions are survivable, but what exactly are they? A recession is declared when the gross domestic product (GDP) contracts for two or more consecutive quarters. A recession lasting three years or that sees GDP reduced by 10% is called a depression. The average business can expect to see less demand and less revenue which impacts cash flow, profitability and jobs. A recession is part of the Business Cycle that we are all subject to namely expansion, peak, contraction, and trough.

What a Load of Hot Air!

Picture the economy as a hot air balloon; the basket as your weekly grocery store delivery, and spending as the fuel keeping the burner lit. In a recession, spending is reduced so the balloon descends. To avoid being pummelled into the ground you need to reduce weight by buying fewer groceries. That means you can burn less fuel to stay airborne. To make ends meet at the trough of a recession, we might swap the balloon for a smaller lighter model. As airlines and holidaymakers found out, a smaller balloon quickly reaches capacity. Flights get overbooked and holidays cancelled because demand can’t be met.

We don’t live in a world compliant with Marxian economics where governments control the heights of the economy and dictate how fast GDP grows. Our capitalist society allows private companies to ride the wave of market economics, fluctuating prices based on supply and demand. We are all part of the global economy. Even those countries with socialist, communist or dictatorship inclinations are susceptible to recession. As the last three years have shown, isolation does not create immunity from world events.

A Brief History of Recessions

The aptly named Long Depression lasted twenty years from 1873 during the second industrial revolution. Amongst the causes in Europe were military conflicts, a new German Empire, and the tech bubble. The global post-WWI Depression of 1919-1926 brought the UK into recession for two of those years. The double-dip Great Recession of 1929-1932 saw the UK’s manufacturing and coalmining areas bear the brunt of hardship exacerbated by the Chancellor’s ill-fated defence of the gold standard. The 1956 Recession lasted six months, caused by high inflation, high-interest rates and resultant credit squeeze made worse by the Suez Crisis. When the UK entered six months of contraction in the 1961 Recession, the monetary policy of Presidents Eisenhower and Kennedy was blamed. The Mid 1970s Recession was another double-dip downturn taking three years to burn out. Caused by an oil crisis and high unemployment the recession was compounded by the stock market crash and miners’ strike. After the Winter of Discontent in Thatcher’s first term, the UK slid into the 1980 Recession. The Early 1990s Recession was caused by unsustainable growth culminating in the UK crashing out of the European Exchange Rate Mechanism on Black Wednesday.

The Great Recession of 2008-2009 began in the USA with the subprime mortgage crisis and quickly went global. Lehman Brothers were the first of over 500 banks to fail as the Credit Crunch ensued. It’s hard to forget the Covid-19 Recession which amongst other things saw stock markets hit by two Black Mondays and a Black Thursday. In 2022 it’s barely been a year since pandemic restrictions ended. We’ve got high inflation, climbing interest rates, the war in Eastern Europe, an energy crisis and political turbulence. However, a Post Covid-19 Recession is no fait accompli.

The Downside to Recession

A shrinking economy typically causes unemployment to rise because businesses generate less revenue from which to sustain jobs. With less corporation tax and income tax being paid, the government has less income from which to finance a recession. Aside from GDP, house prices are another key barometer of economic prosperity. During a recession it is not unheard of for property prices to fall, leaving some homeowners in a position of negative equity. Higher interest rates make goods and borrowing more expensive which pushes up inflation. Households and businesses look to cut costs in a recession. If done poorly, the customer stands to receive substandard goods. This is particularly true in mass production. In a recession, share prices fall and even crash. Pension companies invest in the stock market to maximise returns for your retirement income, but the value of your pot can take a dive during a recession. Advocates of cryptocurrency say it is not linked to stock markets but events of 2022 to date suggest otherwise. Buying low only works if the coin survives and thrives. To promote domestic goods over foreign, governments are not averse to raising import duty regardless of the home economy’s ability to meet demand. Governments borrow money to fund a recession which burdens future administrations with the cost of debt. No matter how much Keep Calm and Don’t Panic thinking you apply; mass hysteria in society, markets and media can make recession a self-fulfilling prophecy.

The Upside to Recession

Believe it or not, there are some positives to a recession. No business is recession-proof, but four industries traditionally weather them better than most. Debt recovery agencies and insolvency practitioners see an up trade for obvious reasons. Confectionery producers have consumers turning to chocolate and sweets for comfort. As people have less money to spend on luxuries such as eating out or frequenting bars, supermarkets benefit. Rather than buy brand new, consumers look to repair white goods, technology, and cars. Hence the spare parts and maintenance industries do well when times are hard. Just as consumers make efficiency savings, so do businesses. A recession provides an unarguable boardroom necessity to streamline processes and reduce overheads. Ideally, operational savings negate redundancies but that is not guaranteed. As businesses lower their price point to attract more customers, products become more accessible to those on lower incomes. A recession provides an economic reality check to businesses and consumers. It prompts us to live within our means and review our own financial situation.

Recession Boomers

The former boss of GE Jack Welch said, never miss out on an opportunity like a good recession. GE was itself founded during the Long Depression before Welch started as an engineer. Founding a business at the best of times is difficult. Founding one in a recession requires a honey badger level of fearlessness. Some of the most successful companies were founded in a recession. The Great Depression (GD) saw the first Wilko store open and it was such a success that a second branch opened a year later. Wilko now has over 400 stores. Brothers Walt and Ron Disney first introduced Mickey Mouse to the world during the GD which springboarded them from a humble enterprise to a global brand. Hewlett-Packard began producing audio oscillators in a garage during the GD with Disney being one of their first and most important customers. Hays Travel was founded at the start of the Early 1980s Recession. More recently they have been associated with acquiring the staff and stores from liquidated Thomas Cook. Software giant Sage Group and sports retailer JD Sports were both founded at the tail end of the 1980s recession. Thanks to the Early 1990s recession, discount retailer Pound Land and computer store PC World were born. Pets at Home was launched eighteen months before the Black Wednesday of 1992. The Great Recession (GR) of 2008-2009 saw healthy snack boxes by letterbox retailer Graze first grace our doormats and PureGym took on the fitness sector. Credit Crunch in hand with the GR, Sipsmith became London’s first new micro-distillery in 187 years spurning a national revival in gin making. Over in the USA what started off as two people wanting to rent out their air mattress for an extra income, fast became Airbnb. The rest, as they say, is history.

Some of Advocate’s former competitors were founded in a recession. New debt collection agencies spring up to cash in on higher demand whenever the economy goes south. Having a well-established business with a proven track record is a priceless commodity in a recession which is why so many debt collection firms quickly fall by the wayside. Clients don’t want to gamble on their case being stuck with a liquidated flash-in-the-pan debt collector. Incidentally, Advocate was founded after the GR and entered the Covid-19 Recession with thousands of successful recoveries already under its belt.

Recession’s God Complex

In the same way, you can’t say a plane crash is good because it won’t burn any more fossil fuel, a handful of ‘thriving in a decline’ businesses are no consolation for the poverty-stricken and unemployed living hand to mouth in a recession. In economics, the Pareto principle implies that 80% of wealth sits with 20% of the population. It can also be used in other metrics such as turnover, profitable ideas, and even accidents. The boffins at Advocate Debt Recovery have attempted to apply the Pareto principle to the advantages and disadvantages of a recession putting the ratio at 1% to 99% respectively.

Recessions are not instigated, managed or ended by the actions of a single individual. They are the amalgamation of events, decisions, and policies. Our global and predominantly capitalist society is innately predisposed to the expansion, peak, contraction, and trough cycle. The wealth, health and happiness of society rides the same cycle. Whilst humanity stands to thrive with prosperity and suffer in destitution, GDP is ultimately a non-sentient statistic. By default, recession is inevitable and for that reason they and all that comes with them are necessary. Whether or not a recession can be deemed evil is a debate for the theologists among us!