Economic depressions and recessions are seen as negative phenomena. However, they also spur economic development. Here are the typical upsides.
Why Crisis Is Important for Any Economy
This year, COVID-19 has shattered most world economies. Due to lockdown in South Africa, the national system was effectively shut down, with businesses closed and consumers stuck in their homes. The global market has seen a dramatic collapse of equity prices. This crisis is compared to the Great Depression, and forecasts are bleak. But is it really that bad?
Any crisis is an opportunity, and this is more than a cliche. Sooner or later, every economy faces a downturn. Recessions and depressions cause fear, panic and erosion of personal incomes. Meanwhile, they may also spur economic renovation. Here is an overview of the common positives and negatives. The latter are usually more obvious, as they are immediately felt by consumers and businesses.
Growing Unemployment
It is a classic consequence of any serious crisis. As companies begin to fail, they resort to downsizing. At the peak of the Great Depression, unemployment stood at 25%.
This is just as salient in the current pandemic. Workers in the gig economy across the world, such as taxi drivers, have been hit the hardest. They are employed in the service economy and have no job security.
Erosion of Capital
During recessions, real capital goods are idle. This includes production facilities, tools, equipment, etc. Eventually, new owners rearrange the resources and rethink production, but this takes time. Hence, losses are inevitable. Equipment may physically deteriorate, or be left to rust due to logistical problems.
Lower Standards of Living
As workforce and capital are unemployed, economic output and per capita income plunge. Fewer goods and services are produced, so there is less to consume. Consequently, families may fail to maintain the same standard of living as before. This causes divorce rates, homelessness and malnutrition to rise.
Negative Sentiment
Naturally, economic decline breeds fear. Consumers lose jobs, and the future is uncertain. Due to anxiety, people and businesses cut back on spending. This slows the economic system down.
Positive Consequences
Even the darkest times may have a silver lining. Despite the pain suffered in a decline, growth will eventually resume. Following a downturn, a national economy is likely to experience the following.
1. Resource Redistribution
In a recession, businesses built on price distortions are liquidated. This brings an important benefit — re-allocation of valuable resources. Under new ownership, these are put to better use, which benefits the economy on the whole. Loss of jobs is inevitable but temporary. The whole process may be likened to the healing of a wound. Stimulus packages released by the government can delay or suppress renovation, as failed businesses get propped up.
Meanwhile, consumers seek alternative sources of income. Trading online is a viable opportunity to earn from the comfort of one’s home. With assistance from brokerage brands like FXTM, residents of South Africa may trade currencies, stocks, and derivatives through the internet. Today, when lockdowns are causing businesses to fail and lay off workers, Forex trading online is in high demand.
2. Changing Investors’ Mindset
During tough times, investors think twice before using borrowed capital or pursuing high-risk schemes. Funds are redirected from the riskiest undertakings to more prudent goals. It is a consequence of any economic downturn. Market participants learn to act rationally.
Meanwhile, entrepreneurs may abandon their startups and migrate back into the sphere of regular employment. The government may hinder this redistribution. This happens when it bails out failing investors or increases the accessibility of credit.
3. Novel Buying Opportunities
Mass liquidations have an important upside: redistribution of resources and assets. This results in new buying opportunities. Equity and property become cheap. New businesses may emerge, using more affordable workforce and land. In the stock market, the downtrend is always followed by recovery.
Following a recession, it is usually dramatic and sends prices to new historic highs. While the market is in panic, and prices are low, investors seize securities that may bring spectacular returns in the future. Unless the government stops the prices from falling, the potential is huge.
4. Increased Saving
Consumers often buy things they do not need to impress others, or to experience a temporary high. This mindset is likely to change. As incomes and profits shrink, humans learn to live within their means.
On the national level, this drives the rate of savings up. The effects may, however, be sabotaged by unwise government policies. During a recession, interest rates should not be suppressed, and excessive consumption should be discouraged.
Conclusion
Every economic crisis has upsides. Assets and resources are redistributed more productively, while consumers discover new sources of finance. A far-reaching crisis can give individuals a much-needed nudge. All too often, we choose instant gratification over long-term benefits. A recession is a trigger for a reevaluation of strategies and priorities.
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