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Why we’re seeing countries enter into ‘coronavirus recessions’

Why we’re seeing countries enter into ‘coronavirus recessions’
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The news can make for scary headlines at the best of times. And the latest news that developing economies in Asia are seeing their first regional recession in 60 years is not cheery.

However, it’s not as bleak as you may think. In this article we break down why the coronavirus pandemic is causing countries to enter a recession and what this means for the future.

Why did coronavirus cause a recession?

As I write, the news from the Asian Development Bank is that Asia’s economy will shrink by 0.7% in 2020, pushing the region into a recession not seen in 60 years.

This is a continent that for decades experienced strong economic growth. So what has happened to mean that it’s facing the kind of recession not seen in a generation?

The coronavirus pandemic has affected more than just our personal freedom and health. Across the globe, we have seen countries go into lockdown, and social distancing measures put in place. And when countries enter lockdown, economic activity grinds to a halt.

When economic activity stops, the country’s output is affected. This then means the country’s GDP (the key measure of the overall strength of its economy) contracts, and it is faced with a recession.

How long does a recession last?

How long a country or a region stays in recession depends on its economic circumstances. Economies typically have some sectors that have stronger output that others. It then depends on the recovery of these sectors as to how quickly growth returns.

For example, some of the Southeast Asian islands are largely dependent on tourism for their economic output. But with travel restrictions in place, they have seen a significant economic contraction as their tourism sectors shrink.

For other countries that depend more on exports, as manufacturing and trading resumes, they will see a rebound in economic activity.

So the good news to take away from a ‘coronavirus recession’ is that there isn’t anything institutionally wrong that caused the recession – unlike when the financial crash hit in 2008. In the case of coronavirus, countries have had to stall economic output to get a handle on the pandemic.

Instead, what we are likely to see is a rebound in economic growth in 2021, as countries return to their pre-pandemic levels of output.

Will the recession have a long-term impact?

What we are experiencing in 2020 is quite unique in that it is happening across the globe. It is not only the UK that is in a recession, but also regions like Asia that were previously driving global economic growth.

It is impossible to predict the long-term impact of such a recession at this time. In the UK, we are faced with increasing unemployment figures as businesses continue to cut costs. That, in turn, leads to a drop in household consumption, which drives economic activity lower.

The biggest risks facing economies around the world is a prolonged pandemic and tougher social distancing measures. While businesses remain closed and consumer confidence remains low, there will continue to be a drag on economic growth.

If you’re worried about your financial situation during the UK recession, then it may be time to take a look at your financial commitments. Have you got outstanding credit card debt that you could transfer to an interest-free balance transfer credit card? Or have you started that emergency savings pot just in case you are made redundant?

All the indications are that economies around the world will rebound in 2021 as we learn to live with coronavirus. But in the meantime, it’s wise to take stock of your own personal finances and protect yourself from the shocks of a recession as much as possible.

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