At the time of writing this article, the arrival of recession was commonly discussed in the news.
But what exactly is a recession, and how does the recession affect businesses, business owners and consumers?
Let’s break down the topic into the following components:
What is a recession?
There is actually no official definition of a recession, however, it is widely acknowledged that the term refers to a period of decrease in economic activity.
A widely accepted standard is that a recession is indicated by two consecutive quarters of negative growth in gross domestic product (GDP). However, more intricate calculations are also applied in certain circumstances.
Whatever the actual definition is, isn't important. What's more important is its impact.
Do I as a business owner need to understand a recession?
It's important for you as a business owner to understand recession because it can affect your business - directly and indirectly.
By understanding what a recession is and how it can affect your business, you can make plans to survive and even thrive during tough economic times. Whether it is to cut costs, find new ways to make money or adapt to the changing market.
It can also give you a chance to identify new opportunities that may arise in a downturn, to possibly improve your business or even expand it in a new direction.
The characteristics of a recession
Some of the observable characteristics of a recession include:
A decline in economic activity is one of the key characteristics of a recession. This decline is usually measured by the Gross Domestic Product (GDP) which is the value of all goods and services produced in an economy. A decline in GDP is an indication that the economy is contracting and businesses are producing less. This can be a result of reduced consumer spending, decreased investment and reduced exports
A recession is often accompanied by an increase in unemployment. This is because businesses may have to lay off workers or close down entirely due to the decline in economic activity. As consumer spending decreases, businesses may see a decline in sales and profits, which may make it difficult for them to sustain their workforce. This increase in unemployment can have a negative effect on consumer spending, as it leads to less disposable income for households and can make the recession worse.
As a result of a decline in economic activity, there is also a reduction in industrial production. Industrial production is a measure of the output of factories, mines, and utilities. A decline in industrial production is an indicator that businesses are producing less, which can be a result of decreased consumer spending, and reduced investment. This reduction in industrial production can lead to further reductions in economic activity, as businesses produce less and may have to cut jobs and wages.
Factors that contribute to a recession
Some of the observable characteristics of a recession include:
Borrowers have to pay higher instalment and interest expense, that extra burden may increase the default rate, this is more severe when unemployment rate is on the high side, hence impacting banks and starting a chain effect
“Hot money” that used to flow into non-traditional investment portfolio such as crypto, unicorns etc starts to hold back, even investment in traditional assets such as property became more challenging (either price drop or no sales despite no increase in price),- Reduction in business activities
In particular to manufacturing activities, the slow down or suspension in the expansion of capacity is a clear sign of recession. This can be first observe in businesses that produce machines or mould, slowly extending to product based business, retail and so on. In general, everyone foresee a declining trend in demand.
Which businesses are likely to suffer from the recession?
It is clear that many industries suffer in times of recession. With less money in the market, industries such as fashion retail, F&Bs, tourism, hospitality, entertainment, property & construction will be the first to face the wave.
With less money, demand will be declined and manufacturers will suffer the next. With the unemployment rate surging, that will affect the banking sectors as the default rate will climbed up.
Possible Strugglers
But who can take advantage of the recession?
Since many may hold back their expansion plan, i.e, less spending on CAPEX, they will tend to spend more on the repair & maintenance instead. Those who are in the business of repair and maintenance will get a bit of the spin-off benefit.
Cooking instead of eating out means more grocery shopping. Shops that often have items on bargain (e.g., Mr DIY, 100 Yen Shop and Reject Shops) will be more attractive. We tend to buy more household items, example we do own cleaning instead of hire cleaner, we do own cooking instead of dine in restaurant.
With more people being unemployed, they may chose to start a small business (with minimum capital), and they will attend workshops and training, and re–education are options to reenter the workforce, hence trainers are more likely to benefit from recession.
Multi-level marketing (Direct Sales), E-Commerce businesses which do not require huge capital will likely to be the first choice for many unemployed.
Possible Winners
What can YOU do about it?
So what exactly can you do now? Don’t wait for the impact of recession to hit before you act.
The recession and its impact is definitely is a scary thought but it doesn't mean that you can't prepare for it.
Just brace for impact.
If your business had survived the lockdown during the pandemic, good news - you've technically survived a recession.
So, keep your chin up prepare for the fight that's to come.