In the first and second quarter of 2022, the United States economy recorded two consecutive quarters of negative real economic growth. This means that after adjusting for inflation, the US economy contracted in size in the first half of 2022.
Almost everywhere on earth a ‘technical’ recession is defined as two consecutive quarters of negative real economic growth.
Almost everywhere. But not the US.
In the US a recession is generally defined as when a little-know research agency, called the National Bureau of Economic Research (NBER), says there’s a recession.
See, the NBER has a different definition of a recession to everyone else, with the agency requiring a somewhat arbitrary ‘significant decline in economic activity that is spread across the economy and that lasts more than a few months’.
The NBER did not declare a recession in the first half of 2022. However, most economists agree that they will likely declare a recession at some point in 2023. Though the timing of the recession is still uncertain, it is likely that a US recession will have been declared by the middle of 2023.
Our Reserve Bank is not yet forecasting a recession for Australia. Instead, the RBA’s latest forecast for GDP growth is of a low of 1.75 percent in late 2023 and into 2024. This forecast was released in August and will be updated in November. It is likely to be revised lower.
Does this mean investors should sell all their shares?
Not necessarily, history shows that markets generally find a floor before the recession is declared*. This is because as an economy enters recession, interest rates are lowered, and stimulus starts to be released. With stock markets mostly forward looking, they start to price in the lower rate environment and rise.
Hang on a minute. By some definitions the US was in a recession at the start of this year, yet interest rates were rapidly lifted by central banks.
A cynical observer might argue that one of the reasons a US recession was not declared this year was to give central banks enough political capital to keep raising interest rates. Were a recession to be declared, it would have been very hard for the US Federal Reserve to justify further interest rate rises.
This leaves markets in an interesting position. Bad economic news will be positive for stock markets at the moment as it will bring closer the timing of a change in interest rate policy.
Do not be disheartened by the current state of the economy or financial markets. This coming recession and shift in interest rate policy will create a land of opportunity in investment markets. Times like these can be extremely fruitful for investors who can sift through the short-term noise and execute a longer-term investment plan.
To learn more about timing your investments on the market, check out our new fundamentals investing course by clicking here.