Studentnomics

The Big Short provides a humorous and informative way of understanding complex financial concepts related to the 2008 financial crisis. The film’s ending contrasts the success of its main characters with the impact of the crash on real people

The movie shows the crash in the housing market caused a severe liquidity crunch and credit crisis, which caused a sharp decline in the value of assets held by banks and other financial institutions. The resulting recession has a big impact on people which millions losing their jobs , homes and savings.

On other other hand , Michael Burry, the central character in The Big Short, made $100 million for himself and $725 million for his investors by shorting market-based mortgage-backed securities and accurately predicting the 2007 housing market crash. So it’s pays to keep your ears and eyes open to events around you and understand how they impact us.

One such event was UK entering technically into recession at the end of 2023 !! Although not as severe as the 2007 one still a gentle way to understand the concept in a relatively safe environment for us and learn the associated concepts.

Oxford dictionary defines recession as a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

In economics, a recession is a business cycle contraction that occurs when there is a general decline in economic activity over two successive quarters. Recessions generally occur when there is a widespread drop in spending

In UK the Office for National Statistics (ONS) estimated that gross domestic product (GDP) fell by a worse-than-expected 0.3% between October and December, following a decline of 0.1% in the previous three months.

It means that the economy entered a technical recession, as defined by two or more quarters in a row of falling GDP. The word technically is used because the drop in output is not significant but only marginal but enough to trigger the definition of recession.

Read more details on how to measure recession here https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Recession

This is the first time UK has entered recession since the first half of 2020, when the initial Covid-19 lockdown sent the economy plunging into reverse.

Our Chancellor Jeremy Hunt believes that this is mainly due to high inflation ( meaning high cost of goods leading to suppressed spending) and the recent run of interest rate rises which would have resulted in higher mortgage rates for many families and hence leaving them with less money to spend then they would other wise be

In general, a recession lasts anywhere from six to 18 months. For example, the Great Recession that started in December 2007 lasted 18 months. But the recession prompted by the pandemic in 2020 only lasted two months but it’s impossible to know how long they will last

There is positivity for start of 2024 with expectations of growth picking up and interest rate potential really falling by summer of 2024

How does recession affect an average person?

As spending slows and the economy shrinks, business profits can go down, too. To keep their profit margins and business running they are likely to reduce costs and one side effect of that is less jobs.

For long term scarring on economy due to recession read this article https://www.epi.org/publication/bp243/

There can be some lessons that can be learnt from previous recessions

For those who have money to invest, this is an amazing opportunity. Stock prices could drop by 20% to 30%, or possibly even more. Even though it may seem risky, the market has always bounced back after recessions. If you invest more when prices are low, you can effectively buy at a discount and earn big returns when the market recovers.

For companies some competitors may struggle or even go out of business during a recession, allowing surviving businesses to gain market share.

Due to lower demand the costs of material , labour and real estate might drop that can be capitalised by companies with strong cash flows to bring in cost efficiencies and help them survive the downturn and come out stronger for future.

Why is it important for us to undertake a recession ?

We are at a stage where we are young and hopeful with a long road ahead of us. If we can observe , read and learn about significant economic activities around us and assess its impact on our parents and society we can be better prepared to deal with them in future and if you are in the right place at the right time equipped with the right data snd insights you could be the next lucky Michael Burry, the central character in The Big Short, which made $100 million for himself and $725 million for his investors!