The benefits of an economic recession and how to prepare for one

Bear market

I recently read an interesting article about the potential upsides that accompany a recession. With much talk of a recession in the coming months in Australia and one already on the cards in the USA, I thought it may be worthwhile to outline some of the positives that accompany the fear associated with a recession.

Ultimately, a recession will bring a slowdown in spending, a tightening in the job market and an increase in corporate restructuring and lay-offs. This, most people are aware of.

However, for those willing to use sound financial and business analysis, a recession can bring a wealth of opportunities and provide the necessary timing to enter a number of markets.

I like to think of a recession as a time where almost everything goes on sale because this outlines the number of opportunities that are available to the everyday person or investor.

I have outlined 2 main investment related benefits of a recession below and then summarised a few common benefits after that:

Reduced housing prices

Many of those who have bought investment properties looking to sell a short time later with hopes of high short term capital gains will not be impressed by the lower house sales prices that accompany a recession.

However, for those who have been considering purchasing a house or investment property (medium to long term) and have potentially already got a deposit ready, a recession may become quite advantageous.

Recessions are typically short lived and the lower housing prices will enable many of the people described above to actually enter the housing market cheaply with the likelihood of relatively short term capital gains when the downturn clears.

In this sense, recessions are also a great time to look for investment properties.

Inexpensive stocks

If you are the type of investor that is after long term capital gains, recessions are similarly a great time to buy company stocks as they are often undervalued.

This is because most people are taking their money out of the stock market in times of recessions and hence the prices of company stocks are driven down for reasons not always logically linked to the earnings of the company.

Understanding where the value is to be found involves understanding how to appropriately value a stock. An introduction to some factors affecting company valuation can be found in my blog on 9 key concepts to understand the valuation and earnings of companies.

To see a further discussion on the effect of the earnings of a company on stock prices, see my blog on what moves the stock market.


Low Mortgage Rates

During the time leading up to a recession, in many cases the Reserve Bank or the Federal Reserve will reduce interest rates resulting in cheaper debt to companies and lower mortgage rates to families and individuals.

This is done in an attempt to stop the country from falling into a recession. This fact, combined with cheaper housing prices, can provide an excellent time to invest in property.

Great Consumer and travel deals

As the recession worsens and people begin to purchase less and less, stores need to provide better deals and discounts to attract consumers and entice purchasing. This typically leads to discounts and low interest finance deals that can be particularly beneficial to the savvy buyer.

In addition to this, second hand bargains are even easier to find because there are less people looking to buy and more people looking to sell.

Most people do not think of travelling during a recession and hence it is a good time to consider doing so because the prices are typically lower. This benefit is added to by the better deals you are likely to receive while travelling.

Recessions are a great time to have a good think about your finances, cut your unnecessary spending in certain areas and think about investment in a number of underpriced goods as outlined above.

To read about the current economic recession, have a look a this visual guide to the financial crisis or read Tom Spencer’s blog on measuring the strength’s of the economy. Click here for the cheapest way to withdraw cash overseas if you are an Australian.

9 thoughts on “The benefits of an economic recession and how to prepare for one”

  1. James, this is one of your best posts yet. Succinct, yet informative!

    While I’m not an expert, your explanation of why interest rates are lowered leading into a recession is a little simplistic. It should be noted that, in Australia at least, the Reserve Bank of Australia (RBA) does not lower rates with the view to stopping Australia from falling into a recession. The Reserve Bank of Australia has a 2-3% inflation target. In the lead up to a recession investment and consumer spending are likely to drop, thereby reducing the upward pressure on prices in the economy. With this in mind, the RBA may lower interest rates in order to keep inflation within the target 2-3% range.

  2. Hi mate,

    Check out my link to an article written about surviving the recession. Gives some good ideas about methods to save money in this time and not feel uncomfortable by it financially.

    Cheers mate,

    drop me a comment some time.

    Alex

  3. good . but need some more reasoning . how it would be benefical to a government as it will lower its earning.ns govt. has to give more subsidies to poors to survive

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