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Recession - What is all about it?

Everybody speaks about Recession. What is it?

In Economics, recession is defined as follows – “A recession is a decrease of less than 10% in a country’s Gross Domestic Product (GDP). The decrease must last for more than one consecutive quarter of a year. The GDP is defined as the sum of private spending and government spending on goods, services, labor and investment”.

Not everyone agrees on a specific definition for determining an economic recession, but most can point to several factors, which can cause a recession. Either significant drop in prices or significant increases in prices can occur. A drop indicates that people may spend less money, thus the GDP is decreased. An increase in price may also reduce both private and public spending and thus decrease the GDP.

A recent recession in early 2000 was caused by the sudden decrease in activity of the dot.com industry. In the 1990s, the telecom industry had made huge amounts of money and began to overreach its expectations in terms of assessing future demand. Suddenly, the previously looked for demand was much lower than expected, leading to mass layoffs, decrease in production, and thus decrease in spending.

Those who initially made excessive amounts of money may still find themselves jobless. Telecom companies significantly cut jobs, and employment rates in the industry have never fully been restored. Telecom companies also cut costs by outsourcing production to foreign countries. While this outsourcing has allowed some companies to continue operations, it left many with training for specific jobs they could no longer perform.

However, other industries have since expanded and raised the GDP. So the recession is termed over even though many still feel its effects on a personal level. Terming a recession as “over” does not necessarily account for positive economic changes for the individual.

What all the things the Recession effects?

Stock Markets: A recession affects earnings by lowering the earnings outlook for the quarter and also a recession affects the earnings guidance that companies forecast. Wall Street analyst estimates usually are revised lower during a recession. In a recession we usually see that earnings drop because people and businesses tend to spend less and are not in an expansionary mode.

Job Markets: Recessions also lead to certain companies closing plants and laying off workers. Layoffs mean that the capacity of businesses to produce goods and services is reduced. Whenever businesses have fewer employees and less factories and facilities, their earnings will drop because of the recession. The weakness of the employment data seemed to change the terms of the debate over the health of the economy. The chances of a recession over the next year now seem to be somewhere between one-quarter and one-half.

Real Estate Prices: Troubled by the mortgage melt down and falling home prices, the U.S. housing market has fallen into a national real estate recession, according to the latest analysis by Housing Predictor. The over-whelming majority of local real estate markets are either in housing recessions or battling to keep their economies strong enough to keep from declining. Housing Predictor forecasts more than 250 local housing markets and at least 221 are in the woes of recession. The subprime crisis, however, is now only partially to blame as the mortgage crisis expands in ever growing numbers into conventional loans. The crisis is unprecedented in U.S. history and could cause the U.S. economy to suffer worse national economic turmoil than caused by the Great Depression in the 1930's. New laws were enacted to help avert a repeat of the Depression and only further interest rate cuts and infusing more money into the economy may help at this point.

Our Perception towards life: When others around start losing jobs - people tend to think that they would either lose their jobs or not get the right amount of pay hikes and as a consequence of this they tend to spend less money because they want to save for the future. When people spend less - there is no buying that will fuel the market - all goods become abundant and companies start loosing out on margins because of less volume of sales and then this will continue to hit the job market and continue to hit until some drastic "feel good" factor comes into the economy.

Recession spreads around the world. Where all it effected?

Canada's government recently maintained that their economy can still avoid a recession despite the battered Toronto stock market. While growth is expected to be minimal until late next year, it is not quite in recession territory yet.

With the banking system flattened, a housing market crash and unemployment and inflation on the up, it is unlikely to be long before a recession is reflected in the growth figures of the world's largest economy.

Mexico is vulnerable to a US downturn due to the amount of cross-border trade conducted. The current economic problems – with little consumer credit and slump in house prices – are likely to affect Mexican tourism and the property market.

Growth has been solid thanks to high oil prices and Venezuela’s rich reserves. It has also been collaborating with rapidly growing Russia by forming economic deals to challenge the US. But as oil prices plummet, Venezuela will have little to fall back on to forge its economy ahead.

A stronger and stable currency, political stability and fiscal responsibility have made the country an attractive place for investors. The housing market is booming and Brazil has one of the best performing stock markets in the world, but US volatility threatens a slowdown.

Confidence in the Icelandic banking system has been shot to pieces and the economy already going backwards fast. Inflation and interest rates are shooting upwards. The krone, Iceland’s currency, is in freefall and is rated just above that of Zimbabwe.

Ireland became the first country in the euro zone to slip into recession. The country's once-booming economy shrank by 0.3% in the first quarter of this year and figures in September revealed a 0.5% fall in growth.

Europe’s second-biggest economy France surprised analysts when it grew 0.1% in the third quarter and avoided recession. Economists had expected French GDP to decline by 0.1% in the fourth quarter after a 0.4% contraction in the third.

Spain is on course for recession after its economy shrank by 0.2% in the third quarter. Another contraction is expected in the fourth quarter.

Britain will suffer a deep recession from which it will not emerge until the end of next year, the Bank of England has warned. After zero-growth in the second quarter, the UK economy contracted by 0.5% between July and September.

The Danish economy has been in recession for several months. Household spending has tumbled in response to higher food and fuel prices. But low unemployment has led to staff shortages – labor productivity is falling sharply and wages are creeping up adding to inflation.

Germany is in recession after its economy shrank in the third quarter. Europe's largest economy contracted 0.5% between July and September, following a 0.4% drop in the second quarter.

Italy is in recession after its economy shrank in the second (-0.4%) and third (-0.5%) quarters. It has lagged behind the rest of Europe for more than a decade, plagued by huge public debt and low labor productivity.

With large gas and oil reserves, Russia is well placed to weather the storm. However, oil prices are tumbling and inflation has remained stubborn. The stock exchange recently slumped to its lowest level for two years, and the conflict with Georgia caused a flight of investment.

The global turmoil has blighted Egypt – soaring food prices have kept more than 40% of the population in the poverty trap. Furthermore, the economy relies heavily on tourism, which is likely to be cut back as developed countries feel the pain of the crisis.

Nigeria - With oil prices falling, growth is likely to be more muted in coming months. Furthermore political unrest in the Delta region is also holding growth. Progress in government programs could herald economic reform but this may be stalled by the global crisis.

Higher interest rates amid tighter lending conditions are slowing growth in South Africa. Skills shortages are a big problem in the country, but there is hope that government spending and investment will be ramped up as preparations for the 2010 football World Cup gather momentum.

India's national income is rising despite the credit crunch. While many are looking to developing countries to cushion the global downturn, India relies on the UK and US to buy its goods. So recessions there would have knock on effects for the tiger economy.

China is the fastest growing economy in the world and has replaced the US as the prime export destination for many countries. While many are talking of a shift of economic power from the west to east, China relies on the west to buy the cheap goods it manufactures.

Japan has entered recession, its economy hit by weak exports and falling corporate investment. The world's second-biggest economy contracted 0.1% in the July-September quarter. Economists had predicted Japan would narrowly avert recession with growth of 0.1%.

Some analysts expect the global downturn and poor company earnings to push Australia towards a hard landing. However, others point to the country's property market collapse two years ago when the central bank eased interest rates and the economy only softened slightly.

New Zealand is officially in its first recession since 1997. Recent surveys of business indicators gave the most negative readings in almost two decades with confidence at a record low.

How to face recession?

It’s nice to be prepared financially for any eventuality and a plan should be in order so that we can effectively face the repercussions of a possible recession. So what are the things that can be done in the face of recession?

One thing that can be done is to adopt a recession-proof portfolio, like saving money. Tips for recession, including how you can save in these tough times, are readily available online or you can always ask your financial adviser. Utility stocks are recommended during recession times since most of them pay reasonable dividends. Additionally, the goods and services utility companies offer are generally protected from the negative effects of recession.

One of the actions that the Fed may undertake if a recession hits the economy is to lower the interest rates. It will do this in order to put the economy back in its well-balanced and healthy condition. As a result of a potential interest rate decrease the dividends you will get from a utility stock will be far more appealing than the money you will get if you have invested in bank CDs or some other fixed income investment solution. Utility stocks are beneficial during difficult economic times since they are protected from the negative effects of recession. Additionally, they provide a steady stream of income and their stock prices are rarely affected by the bad market conditions.

Before we can go deeper into ideas on saving money tips for recession its best to reiterate perhaps the simplest thing that you can do is to live within or below your means. One simple suggestion is never to spend on something that you cannot afford. For this reason its best that you take a good look at your extra expenses for the past year. A deeper look at last year expenses will reveal that some expenses may be related to entertainment. These could be fun activities during the weekend in the form of recreational activities like bowling or your love for high tech stuff like devices and fun games. Cutting out a little bit of this might not be what you want to do, but it will allow you to save some money for an extra financial cushion which may be needed later on for the necessities of life.

To thrive well in these trying times, its best to control the money that goes into this segment of expenses. If you think that you cannot live without your bowling activities, then it is suggested that you find ways on how you can gain discounts. Or why not try what outdoor activities like a visit to the park can help you. Fun activities that can let you spend some quality time with your family.

Try to work out a cheaper cell phone plan by asking your provider for new promos and plans that will be advantageous to you. Save on power and energy bills. Start collecting the grocery saving coupons. Whether there’s recession or no recession; its best to act and start saving money.

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