To put it simply, a recession is an extended period of time during which an economy shrinks or experiences negative growth.
What is a recession?
It is a phenomenon with adverse effects on individuals, organisations, communities, and nations, especially when it comes to finances. This is why signs of an impending recession usually unnerve economists and governments.
In the context of the challenge that we are facing today, financial experts believe that Malaysia is on the brink of a recession due to how the COVID-19 crisis has reduced our manufacturing output levels and slowed our country’s economic activities as a whole.
How do we protect ourselves then, you ask? By making sure that we have our facts correct and that we aren’t swayed by myths or baseless assumptions about recessions, of course!
Myth 1: Malaysia has never had recessions
Yes, many Malaysians have enjoyed quality lifestyles for quite a while now. Just look at the way we shop during sales, how we splurge on food, and a large number of luxury cars on our roads.
This does not imply that Malaysia has always been recession-proof, however. Our country battled a recession fairly recently in 2008! The damage on Malaysia’s economy at the time was seen mainly through a drop in our export levels and the fact that our manufacturing industry shrunk by 14.5%.
If you’re wondering why you didn’t feel too much of a strain despite all of this, perhaps it’s because of the government’s financial stimulus package, which injected RM67 billion into the economy to cushion the impact of the recession.
Myth 2: Recessions happen all the time
If you’re looking at the prices of local stocks, and you notice that they have been dropping continuously for just a few days, don’t immediately sound the alarm and declare, “Ah, must be recession lah!”
And, if you believe that flattening the COVID-19 curve and ending the Movement Control Order (MCO) will solve everything, we beg you to differ.
A recession happens only when an economy goes through a decrease in activity for a few months back-to-back — ideally, for at least two quarters of a year or 6 months. This occurs along with rising unemployment levels, lower income levels, and a drop in manufacturing and retail levels.
If all these boxes are ticked, then yes, you are most probably experiencing a recession. Otherwise, it is perfectly normal for businesses to experience drops in their performance for short periods of time, so don’t kan cheong!
Myth 3: Don’t invest money during a recession
On the contrary, recessions can present some unique investment opportunities.
A popular investment vehicle or tool during recessions would be real estate. As economic downturns tend to lower the prices of property, you may find yourself suddenly able to purchase a house or an apartment that was previously out of reach.
If so, it would be wise to do just that. Recessions are only temporary, after all, so the economy is bound to recover, and the prices of properties will definitely increase again in the future. This, in turn, would allow you to sell your properties for sizable amounts of profit.
There are also a few other investment opportunities that you should look out for during a recession, as explored by Loanstreet here - 5 Things To Invest In During A Recession.
Myth 4: Recessions are only caused by uncontrollable events
While the current recession threat is related to the COVID-19 outbreak, it would be inaccurate to say that all recessions are caused by unpredictable events.
For example, look at the Great Recession that plagued the world from 2007 to 2009 — which also caused Malaysia’s last intense recession experience. This recession was not created by a large-scale natural disaster or by a pandemic but was instead birthed through the lack of government regulation in the financial and property markets in the US.
This led to too many risky investments being made by financial institutions and too much money being borrowed by consumers, culminating in the collapse of the US economy and the economy of the world by extension.
As such, although all good things must come to an end and every economy must go through its cycles of growth and decline, some recessions can be avoided through proper financial management.
Myth 5: There’s no way to prepare for a recession
Yes, history has proven that not all recessions can be avoided and that all economies must go through downturns before they can reset themselves and grow even more.
This does not mean that you cannot prepare for a recession, though, and that you should just treat it as something unavoidable. Aside from strengthening your understanding of recessions and saving up regularly for unforeseeable challenges like the COVID-19 outbreak, you can also start preparing by paying closer attention to news on your country’s economy. There are bound to report on the signs described above in Myth 2, so look out for those.
Then, examine your expenditures and begin limiting your spending habits to necessities. By making this practice a part of your daily life, you will be preventing your personal finances from taking too much of a shock once the recession truly kicks in.
If you find that you can comfortably spend a bit more money than what is necessary during a recession, don’t rush out to your nearest cafe to lepak with your friends. Consider saving or investing this money instead — because you never know how long the recession will last, and it’s always better to be safe than sorry!