We hear more and more about the ongoing recession. The level of inflation in Poland has already reached 15.6% in June and in July. Some people say that the Polish Economy has fallen down. Asset valuations are falling drastically, and the market is beginning to experience fear and anxiety. But what exactly is a recession, are we sure that it will come, and how will it affect Poland? But also, can we prepare ourselves for it?
- What is a recession?
- Causes of recession
- Will this recession be unlike any other?
- Effects of the recession
- How to prepare for a recession
What is a recession?
At the very beginning, I would like to point out that I am not an economist, and with this article I am collecting for you the most valuable facts and analyses from Polish entrepreneurs and economists about the Polish economy and recession. I mean people who are authorities to me, as we talk about financial matters. I assume that such a summary is needed for a large part of us. This will allow us to better understand the changes taking place around us and prepare ourselves for the direction in which it may go.
But to the point, what is a recession?
Recession is a phenomenon that consists in the fact that the pace of economic development is significantly slowed down. In other words, it is a period of decline in the economy. At the same time, you hear about numerous insolvencies and consumer or company bankruptcies. The valuation of many assets is falling, so fear and panic are beginning to reign in the market. From a technical point of view, we can talk about a recession when a country’s GDP falls two quarters in a row. It is worth mentioning here, that a recession is a permanent element of the economic cycle – it does not happen for the first time, and it is certainly not the last time.
Such drops appear once in a while and no one knows exactly when it will occur, how deep it will be and when exactly it will end. As a result, each recession is a little different and usually has some characteristic flashpoint. A period of recession is usually associated with an increase in unemployment, a decrease in our standard of living, lower economic activity, bankruptcies of companies and a decrease in the value of assets, such as stocks or real estate. But what is the most important, after every such storm the sun rises again. This means that after each stage of such a reset, there is a renewed economic growth. Have a look at the recessions in the US (country with one of the largest significant economy systems in the world) from 1970 to 2020.
Causes of recession
Inflation reaches levels at which we are forced to reduce our spending and start saving money. High interest rates have significantly reduced our household budgets through higher loan installments. The possibilities of taking new loans by individuals and companies have drastically decreased, and as a result, the real estate market has drastically felt the lack of new customers. Entrepreneurs are not able to make new investments because they no longer have access to cheap money. Companies with their increased costs and disrupted supply chains, through COVID or war, still see demand in the market. But they are not able to provide supply at the same price as they could have offered even before 2019, because their costs, referred to above, have increased drastically.
These costs and this mood are reflected in our society. We talk more and more often with our friends and family about huge price increases. Thus, we are looking for a way to reduce costs and buy less. This, in turn, reduces demand, which cools the market even more. And if we buy less, entrepreneurs and companies produce less and therefore do not need as much gas, oil, metal, wheat, or corn.
But such a decline or slowdown is not entirely a bad thing. A decrease in demand for basic production raw materials also causes a decrease in their prices. So, in theory, it should have a positive effect on reducing inflation.
Will this recession in Poland be unlike any other?
Each recession has a slightly different genesis. Between 2000/2002 we had a bubble inflated on the computer industry. In 2008/2009, we had an inflated real estate market, to which sub-prime loans mainly contributed. In my opinion, this is explained in a brilliant way in the 2015 film, “Big Short”. A really good star cast, presented such a heavy topic as the crisis of the world market in the form of a comedy drama. If you have a free moment, and you would like to learn more about the world crisis, explained in a very accessible way, I encourage you to watch this movie.
But what is unique about the recession that is probably starting now? Certainly, a huge scale of printing the money around the world, which helped to drive away the consequences of lockdowns. However, now it is coming back to us with redoubled strength. In addition, the already mentioned supply shortages and the geopolitical situation, which have had a negative impact on the supply chain for producers. As a result, all of these things combined, increase the inflation.
In the normal case of economic declines, governments decide to cut interest rates, which translates into an increase in the availability of cheap money on the market. Thanks to this, the economy continues to spin. That’s what happened with COVID. But at the moment, it’s not that simple. Governments act differently than usual due to galloping inflation. They raise interest rates to withdraw some capital from the market to slow inflation. This recession, if it occurs, seems to be different from the others. Mostly, because we are dealing with a multitude of contradictory indicators.
Effects of the recession
What happens during a recession and why so many people lose a huge part of their wealth? This is influenced by the lack of preparation and awareness of market processes combined with emotions. Unfortunately, when it comes to money, we usually trust emotions and not logic. Therefore, we tend to fall into excessive euphoria or just fear. These emotions, combined with the lack of basic knowledge about the market, prevent us from recognizing at what stage the market is at the moment. And as I mentioned earlier, recession, economic growth, then again recession and economic growth are the so-called cycle reset. Which is a natural repetitive market cycle.
How to prepare for a recession?
There is no clearer answer to this question that will ensure 100% success. However, referring to our “Polish financial authorities”. However, we can describe a set of rules that can help us survive this difficult period.
What do these look like?
- Let us not fall into panic. A recession is a bad time to sell, because every crash is followed by a rebound. Therefore, the worst thing we can do in a period of low valuations is to realize losses through selling at the wrong time.
- Whenever possible, try to take advantage of the recession to buy investments on your own. I am not at the stage yet where I can afford to “make money from the recession”. But on the list of my personal aspirations, there is the resolution to be better prepared for the next recession. We must remember, that what some of people want to get rid of in difficult times is a real bargain for others.
- A recession does not last forever. On average, the downward trend in all previous recessions lasted for several months. After this time, the market begins to recover. It takes an average of 2 -3 years to return from the lowest to previous values.
- During a recession, it is the seller who cares more. Usually, there is a shortage of customers during this period, so there is a change of proportion between demand and supply. For example, instead of three clients per apartment, we have one client who chooses between one of three available apartments. This is conducive to price drops.
- Not every company loses on a recession. This is important not only for investors, but also for people who are looking for a job during the recession. Supermarkets record continuous profits, because the society has to eat. With growing problems, people often prefer to indulge in entertainment. Thanks to this, the streaming services have made spectacular profits in the early weeks of the pandemic.
And now the most controversial point…
Because, according to people who are in a very comfortable situation during this recession, a recession is a time to pay. It is a pay for comfort and improper financial decisions from the period of economic growth. A long period of growth makes people and companies lazy. Even though it’s a bitter pill to swallow, I think there’s quite a lot of truth here. At some point in growth, it seems to us that this will always be like that. Such approach provokes increasingly ill-considered purchasing decisions and the temptation to live without thinking about securing our future.
Summary of the recession in Poland
It should be remembered that a recession is the end of a certain stage. And every end of this type is the beginning of something new. Each country goes through a period of recession a little differently, which is why it is not clear how exactly it will look like in Poland. However, we can, looking at the history of the economy, try to prepare for it. And at the same time, go through it as good as we can. And this is what I wish for you and for myself.
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Special thanks to Eamon Gosney, who has helped with proofreading of this article.