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What is a recession?

What is a Recession

A recession involves at least two consecutive quarters of negative real GDP. GDP is one of the primary indicators used to gauge the health of a country’s economy. It represents the total value of all goods and services produced over a specific time period. USA, China, Japan, Germany & the UK have the largest GDP’s around the world  as of 2016. The GDP calculation is a measure of consumer spending + business investment + government spending + net exports.

History of Recession

The international Monetary Fund defines a global recession as a decline in annual per-capita real World GDP. Since WW2 there were only 4 global recessions. In (1975, 1982, 1991 & 2009), all of them lasting about a year. In 1970 and 1998 there was annual GDP growth rate of 3% or less which can also be considered as a recession. It is difficult to define, due to the GDP growth of developed and developing countries being so different. The IMF estimates that global recessions occur over a cycle lasting around 8-10 years.

Where are we now

Global GDP is estimated to have grown by 3.09% in 2015 and looks to grow to 3.16% in 2016 with recovery being mainly driven by developing economies. The US is experiencing small growth in GDP at around 1.2% per quarter and China is  experiencing growth at around the 6.5% per quarter level. The real worry looks to be Japan who are the 3rd largest economy. After seeing a 0.02% expansion in the first quarter of 2016 and with their economy relying heavily on QE, it seems like it’s just a matter of time until their  spiral hits rock bottom. That could have a massive impact on the worlds economic status.

At some point in the near future we will enter another recession. Factors such as Brexit, the Japanese debt crisis, curtailing consumer spending and the ridiculous US presidential election could all be worthy catalysts to send the world back into near negative economic growth. The housing bubble in the UK has so far remained glossy, but with the amount of new building projects in London alone at a super high level prices will be coming down due to over saturation of the market. No one knows when any of this will happen but it is inevitable. You just have to ensure your skills are sharpened so your job is secure and if you can save money for that moment when the price of everything drops you can find yourself a bargain.

Banking stress tests

What is a stress test in banking

A stress test in the land of finance is an analysis or simulation designed to determine the ability a financial instrument has to deal with an economic crisis. Usually projections are based on the best case scenarios. We’ve all seen Dragons Den for example, where the pitcher is asked about yearly projections, Yr1,2,3. These estimates are based on hitting targets, growing workforce & consistent economy etc. In the lucrative world of banking the following is usually considered in a stress test;

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