Andy Serwer and Dylan Croll from Yahoo Finance had an interesting “morning brief” today. Looking at the last few recessions they observed two things that maybe indicate how severe a recession will be and how long it takes to recover from it:

  • The surprise factor: The economy plunges when the downturn comes as a surprise. Exapmles: 2008, 2020. In contrast, the recession is much more mild when everyone thinks it’s coming. Examples: 2001
  • The fringe factor (not cringe): How deeply entrenched is the problem? The deeper the problems run, the longer it takes to recover. Example: In 2001 the problems were largely limited to the tech sector which was a giant bubble. So when that imploded the overall economy wasn’t that badly affected and the recession didn’t last very long. In contrast, 2008 was a big financial mess, including household debt, so that took a lot longer to recover from.

(“Surprise factor” and “fringe factor” are terms I made up.)

I love the last sentence though:

Of course, some of this is pure speculation. Or perhaps wishful thinking. But when have economists — or columnists — ever been short on either?

With that in mind, they suggest that 2022 might be a relatively short and mild recession. Why?

  • Everyone is expecting a recession. And since Elon Musk proclaims it on Twitter no one can claim they didn’t know, right? ;)
  • The economic downturn was caused by COVID and our response to it. A lot of these problems are going away: they’re not caused by a messed up economy or finance sector.
  • Also, inflation will ease down because: COVID support has ended or will soon. Supply chain problems are easing up. The pandemic didn’t destroy things that drive prices down: technology & the US being an aging society.

A few thoughts:

  • Others have argued that everyone expecting a recession makes it more likely that there will be one in the first place. That’s why the CEO of Cisco has warned about talking too much about recessions. It would be ironic if talking about it then also would make it less severe. What a great thing for people with too much time do discuss: do you avoid expectations of a recession and risk making it more severe if it comes anyway?
  • looking at the past two, three recessions is like crossing the street twice safely and concluding that streets are a perfectly safe place to be. To be fair, Serwer and Croll know that.
  • The conflict in Ukraine could well become much bigger, involving more of Europe and NATO directly. (Hello Kaliningrad.) Apart from all else that would affect the global economy big time and for a long time.
  • Globalization is being rolled back. The US is trying to reduce their trade deficit. Near-shoring is a thing, and so is building and protecting critical local industries. Taking sides becomes a thing again. Those changes cost money and opportunity.

I’d love to read more about the “surprise” and “fringe” factors though. Will make a post if I find something interesting, for example something research-backed.