Economic Downturn Vs Recession

With rising interest rates and oil prices, consistent global supply chain issues, fall in stock prices and Russia’s war in Ukraine, 2022 is turning out to be worse than anyone’s expectations. But there’s a light at the end of the tunnel with the help of CDD surveys. 

Business Queensland defines an economic downturn as a general slowdown in economic activity over a sustained period of time. A downturn also features a loss in GDP. In essence, an economic downturn is the period right before the economy enters into a recession. Some of the features of an economic downturn include rising unemployment, fall in share prices, decreasing investment and increasing public debt. Downturns are typically cyclical in nature and do not last long. 

A recession is, on the other hand, defined as a significant decline in economic activity that lasts for months or even years. According to Forbes, experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales and contracting measures of income and manufacturing for an extended period of time. Economist Julius Shiskin, claimed that the defining features are two consecutive quarters of declining GDP.

Causes of a Recession

In general, there’s a lot of ambiguity on what causes a recession and several economists posit different theories. One of the categories of factors that can cause inflation are financial. Elements such as oversupply of money and extension of credit lines can create risking bubbles, as witnessed in the economic crisis of 2008-09. Certain psychological factors such as bullish behaviour of investors during boom periods can also lead to recession. Supply chain shocks that affect important industries such as energy or transportation can have such far reaching effects that they cause many companies to take back and cancel investment and hiring plans, with consequent effects on employees, customers, and the stock market.

Economists today fear another recession is coming due to soaring inflation over the past years. Let’s examine some possible causes of the rising inflation.

Why is inflation rising?

In the EU, Inflation is mainly triggered by supply side shocks such as rise in oil prices. On the other hand, If we look at the U.S., we can attribute inflation to both supply and demand side causes. Due to aggressive stimulus packages offered during the Biden administration in response to the pandemic, it is natural that demand will go up. Due to these support packages, consumer demand and spending shot up during the post-pandemic period. On the supply side, there’s supply chain disruptions that affect not only the U.S. but inflation in the EU. McKinsey argues that there are three crucial roadblocks facing global supply chains: labour shortages, lack of equipment, and the ripple effect of global bottlenecks.

The inflation effects have been compounded by the war raged on Ukraine by Russia. The invasion of Ukraine has also caused oil prices – that were already high due to stifled consumer demand post the pandemic  – to rise above $110 a barrel, as many countries imposed sanctions on Russia. Additionally, there is the matter of quantitative easing, which further causes inflation. 

Quantitative easing

The process of quantitative easing is fairly straightforward and goes like this:

• The Central Bank purchases assets: it has the power to create bank reserves on its balance sheet. Moreover, they then use these reserves to purchase long-term Treasuries from financial institutions 
• Money flows into the economy: as a result of these transactions, financial institutions have more money on hand, which they can push into the economy
• Interest rates go down: With the central bank buying a lot of bonds and fixed income assets, the prices of bonds go up and yields go down. Lower interest rates make it cheaper to borrow money, which further encourages economic activity
• Boosts confidence in the market: businesses and customers both push in more money into the economy in terms of hiring more people, buying stocks and overall spending more.

A big downfall of quantitative easing is that it can cause inflation. When a central bank "prints money", the amount of dollars circulating in the economy increases. This can cause a decrease in the purchasing power of money as increased money supply and people can raise their demand for the same amount of resources, pushing up prices. 

Now that we have analysed what a recession and economic downturn imply and looked at the causes of inflation, we will look at the role of CDD surveys in a downturn.

The role of CCD surveys in an economic downturn

Any investment manager needs to have readily available data at specific monthly intervals to be able to have a clear picture of both inflation and supply chain situation. With the help of a panel provider like GrapeData, the knowledge gap between on the ground individuals in emerging markets and investment managers can be closed. Data provided by a CDD survey can help to do the following:

1. Track trends and prices

For example, if a business is selling product X in various forms and at various locations and a period of downturn comes about. Now, this business might be experiencing declining sales and may want to gather consumer sentiment about their product. Data from a CDD survey can help do that. Through data analysis, a clear picture can emerge of the trends in sales and then the business can make a strategic decision. This decision could involve either reducing the price or adding promotional elements such as free gifts or vouchers. 

2. Get the most of your money for your business

Just like data from a CDD survey can help a business evaluate declining sales, it can also help a business evaluate which supplier to choose. Say, that I can buy a product from 50 different suppliers and they all recently shot up their prices due to inflation. Also, I have the option to choose from a physical or an online store. With the help of information from a CDD survey, I can evaluate which is the most competitive price and make the best decision for my business. 

3. Spot outliers and evaluate causes 

A CDD survey can help identify outliers and help understand why they are appearing. For instance, business X sells a product for £5.99 but most other businesses sell it for £17.99. So, you as a business can evaluate why this is the case. Perhaps, there’s an opportunity to cut costs and emerge as a first mover advantage. 

GrapeData aggregates insights which could be either in-depth opinions about certain trends or qualitative data about certain products or services outside of your organisation. Our research and analysis capabilities ensure that our clients are thoroughly aware of the opportunities available to them in a particular sector. GrapeData is managed by partners who have first hand experience in data gathering and analysis. Our core team is diverse and international, ensuring we leverage our expertise to provide innovation to some of the largest enterprises in the world.

If you'd like to see how we can help you, please submit a request for a due diligence survey here. Or if you are a survey respondent you can sign up.