WHAT IS AN ECONOMIC RECESSION?
Well what is Economic Activity?
Economic Activity basically means governments, businesses, and people are spending and buying less. A way that we track economic activity is through a term called GDP which stands for Gross Domestic Product.
GDP (Gross Domestic Product)
Think of GDP as the total dollar value of ALL the goods and services produced within a country. Learn more about GDP here.
GDP is made up of 4 components: Consumption + Investments + Government Spending + (Exports – Imports)
1. Consumption (C): is the purchasing of any goods/services.
Ex: buying a car, or shopping, or eating out.
2. Investments (I): are referring to business spending which helps create jobs.
Ex: if Amazon were to open a new delivery plant in Toronto, that would be considered under investment expenditure.
4. Net Exports (Exports – Imports) (NX): Exports are any goods being sent to other countries, and imports are goods that the country brings in. Net Exports is equal to all of the goods/services exported, minus the goods/services imported.
Ex. Canada imports a lot of good from China
If you use this formula GDP = C + I + G + (NX), then you can calculate the country’s GDP.
So if GDP is lower than usual, that means governments, businesses, and people are spending less, which might eventually lead to a recession.
3 major factors Causing a Recession in Canada
Now that you know what causes a recession, let’s take a look at 3 major factors contributing to a declining GDP in Canada in 2020.
1. Sharp Decline in Oil Prices:
If you’ve been outside at all, you’ll notice something you’ve never seen before. Yup gas right now is EXTREMELY cheap.
And guess what makes about 11% of Canada’s total GDP. Yup, it is oil and gas. Oil and gas is one of Canada’s main Exports, products we sell to other countries. In just the past few weeks, there has been an extreme drop in the oil and gas prices.
Example: In Feb 2020, the price of crude oil was selling for about $50 per barrel. In March 2020, it is selling for $22 per barrel.
That means Canada is making 50% less from exports, which is one of the major contributing factors to a 2020 recession.
2. Lack of Productivity:
On March 23, 2020 the Toronto mayor announced a state of emergency due to the COVID-19 virus. This means that all non-essential businesses MUST close, and people are forced to work from home or not at all.
This means that a lot of people normally productive people are now going to be unproductive.
Instead of working people will just be watching Netflix at home, which will significantly reduce Canada’s GDP.
3. Fear of the unknown:
The last factor leading Canada into an economic recession is the fear of the unknown.
When people are scared, they don’t like to spend money –>
When people aren’t spending money then businesses aren’t able to sell their products and services –>
Then people lose jobs –>
Then people spend even less money and it’s a downward spiral
This fear of the unknown leads to less consumer spending, and eventually a recession.
Conclusion
A recession is a normal part of the economy’s cycle. Although Canada may be entering a recession now, in a few months or years, the economy will recover.
Overall the three main factors that will lead Canada into an economic recession in 2020, are:
- The decline in oil prices, leading to less Exports
- Lower Productivity due to COVID-19
- The Fear of the Unknown
In the next few weeks I’ll be writing more articles about how you will be impacted if there is a recession and the policies in-place to prevent a recession. Subscribe if you enjoyed this article.
