The Covid-19 pandemic and political instability worldwide have severely affected the global economy. Supply chains are disrupted. There is a huge shortage of labor. Prices of materials and goods have soared. As such, both consumers and businesses alike have been impacted. Interest rates are on the rise, which has made the average American’s affordability take a dip. Economists and politicians are convening to decide whether the country has a bad economy or not.
But what is a bad economy? And more importantly, is the economy bad right now?Â
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What Is a Bad Economy?
Also called a recession, a bad economy is when economic activity slows down significantly. It usually lasts a few months but can also take years if proper measures aren’t taken. A general standard to identify a bad economy is when GDP remains negative for two consecutive quarters. This is accompanied by rising levels of unemployment and a fall in consumer demand. But the most obvious sign of a recession is inflation. Prices of all goods and services in the market start to increase, and people stop buying things other than basic necessities.
Many factors contribute to a bad economy. These can range from economic to financial to psychological factors. A sudden shock to the economy is a major reason behind recessions. The Covid-19 pandemic was a huge shock that halted the global economy. Too much inflation also leads to a bad economy. When prices are too high, banks increase interest rates to control them. But very high interest rates lead to a slowdown in economic activity. When businesses and citizens of a country are under excessive debt, a recession is inevitable. Defaults and bankruptcies result in a bad economy. The 2008 financial crisis is a prime example of this. Other reasons include asset bubbles, excessive deflation and technological breakthroughs.
How Long Does a Bad Economy Last?
The National Bureau of Economic Research is responsible for tracking recessions. According to the NBER, the average recession lasted about 21 months from 1854 to 1919. Things have improved since then. Economic data shows that the average recession duration dropped to 11 months in the period from 1945 to 2009. We’ve seen four recessions in the last thirty years, and the average duration of these was nine months. These were:
Gulf War Recession: The First Gulf War caused oil prices to spike at the start of the 90s. This led to an eight-month recession.
Dot Com Recession: The tech bubble crash, 9/11 attacks and corporate scandals led to a nine-month recession where the US faced many economic problems. But these were handled efficiently, and the economy recovered rather quickly.
Great Recession: The Great Recession lasted well over eighteen months and was caused by the housing market bubble. This recession is almost double the length of all recent recessions.
Covid-19 Recession: The most recent recession was caused by the outbreak of the CoronaVirus. The recession lasted only two months, but the aftereffects are spilling over.
The State of the Economy Today
There’s a lot of debate going on between economists about whether we’re in a recession right now or heading toward one. Economists over at Bloomberg suggested we’ll be in a recession by the second half of 2023. Nomura Holdings Inc. predicted we’d face a bad economy by the end of this year. Some expect the US to circle around a bad economy in the coming quarters.
The Gross Domestic Product (GDP) saw a sharp decline in the first half of 2022. But data for the third quarter shows a rise of 2.6%. This is some good news. At least we won’t be in a recession if we go by the general definition. But inflation is where the problem begins since there is more than one way of heading to a bad economy. The Consumer Price Index has been growing by a whopping 7.7%, according to recent reports. The Fed increased interest rates to curb inflation and bring CPI to moderate levels. But that has its own negative effects. The affordability of the average American has fallen. The housing market is a clear indicator here since mortgages have become increasingly expensive.
Reasons Why the Economy Might Be Bad?
We might not be in a recession right now, but the state of the economy isn’t looking good either. A bad economy just might be around the corner as we head into 2023. Here are a few reasons why.
Global Chaos
The global economy isn’t looking any good either. The pandemic and political situation has had a chain effect of bringing about a bad world economy. The war between Russia and Ukraine is ongoing, and it has put all of Europe in a chokehold. Supply chains throughout Europe have been affected, which has inadvertently impacted the US in the form of supply shortages and price hikes. Energy prices have skyrocketed because Russia has threatened to cut off energy supplies to the EU. There has been a labor shortage worldwide since China shut down some of its major cities following its zero-Covid policy. All of these will have spill-over effects that will drastically worsen America’s economy.
The Stock Market
A major factor in the stock market is speculation and investor confidence. But if the economy is in shambles, will investors still stay optimistic with their money? Probably not. The stock market has lost over seven trillion dollars this year. This is almost a fifth of its value. Nasdaq is already in a bear market. This is when a market faces a continuous decline in prices. Investors are exiting the market as they have no confidence in company profits due to high interest rates. A majority of consumers depend on the stock market for their income. As the market drops, they’ll lose their income and investments. Consequently, consumer spending will fall, and so will GDP.
Rising Interest Rates
When inflation gets out of control, it’s the central bank’s job to curb it. And they do so by increasing interest rates. This makes borrowing more expensive, and people think twice before using credit cards or taking out a loan. It’s an intentional slowdown of the economy. When consumer spending falls, companies will be forced to decrease prices in order to make profits. But the thing is, the Fed was pretty late to the party. Inflation has been running rampant since 2021, and the Fed only raised rates in March 2022. In May, the Fed raised interest rates by half a percentage point. This is the most significant single increase in two decades. This has put quite the pressure on consumers, businesses and investors. If only the Fed had intervened earlier, there wouldn’t be any need for such drastic measures.
Preparing for a Bad Economy?
A bad economy is when economic activity is slow throughout a country. The economy seems to be in shambles right now. Prices are rising, interest rates have skyrocketed, and a lot of confusion is going around. During such times, it becomes difficult for people to decide what to do with their money. It’s best to curb your expenses and save more. You never know what will happen next!
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