The Next Recession: not if, but when

The great slump of 2008 – where the UK economy contracted 5% in one year alone and suffered six consecutive quarters of negative growth – took the world by storm. Politicians, businesses, and economists dared to believe that western market economies had, in Gordon Brown’s infamous words, ‘abolished boom and bust’.

While we’ve enjoyed something of a recovery in the last few years, any business – small businesses especially – should consider the more depressing question: when is the next recession going to be?

It is, unfortunately, a question of when, not if. While there is no axiomatic logistical proof that recessions are inevitable, the historical evidence is overwhelming. In the UK, each of the last four decades have featured a recession, and in the US, every six. Classical finance theory suggests these slumps represent a return to ‘equilibrium’: necessary cooling-off windows. Hyman Minsky’s famous ‘Financial Instability Hypothesis’ adds the important caveat that what we call ‘recessions’ are really just us hitting the bottom bands of an ascending channel in a growth trajectory trending upwards. Nevertheless, ruin is caused because most businesses in good times are inevitably unprepared even for minor downturns. Companies too often operate on tight profit margins, rely on easy credit, reliable cashflow, and a ready labour market. These underprepared businesses are the first to fall when the downturn hits and then the market panics. And panic is contagious.

It does not take a Wall Street crash moment to cause a recession when the market is overconfident: just a small trigger will do it. Something smaller than a referendum result, an oil price dive, or a run on a high street bank. Marko Kolanovic of JP Morgan thinks the next recession could even be caused by a ‘flash crash’: an automated stock sell off precipitated by a computerised trading algorithm. It’s really that precarious, especially in an increasingly interlinked globalised marketplace.

Politicians are confident we have ‘learned the lessons’ of the last crash. While we agree that its certainly unlikely the next recession will begin in the banking sector – not least due to the huge capital buffers and regulatory framework now in place – it’s a mistake to believe the underlying weaknesses of the world economy that underpinned 2008 have disappeared. We’re still betting the ranch on access to cheap and easy debt. And yet, the size of the British deficit and structural deficit remain enormous. If lenders were to lose a little confidence, we’re only one step from another crunch.

So when is this inevitable recession arriving? Experts think it’s imminent. Market analyst Simon Ward predicts 2019 or 2020 while John Normand and Federico Manicardi of JP Morgan thinks 2020. US economists – Art Cashin, data analyst Peter Boockvar, the Chief U.S. Equity Strategist at Credit Suisse Jonathan Golub and the vast majority at the Economic Cycle Institute – also agree that the booming economy across the pond will slump within the next two years, and pull much of the developed world – and certainly post-Brexit UK – down with it.

Recessions are usually bad news for business, but they can present opportunities too, especially for small agile players who can take business from weakened or bust competitors, buy stock and acquire distressed assets, or take over struggling rivals. But to be able to survive and capitalise on market disruption, smart small businesses have to place themselves in a position to do so.

In a bear market with liquidity disruption, cash is king. To give your business the best chance of surviving the next downturn – and capitalising on it – what better way than to protect your current profits while the sun is still shining. This is where Trade Profit Stabilization (TPS) – a protection mechanism created for small businesses willing to think beyond the next few years – really stands out. TPS is designed to help small and medium sized businesses ride out periods of trading instability brought about by unpredictable market factors, ensuring that the protected business has the profitability and liquidity needed to capitalise on recessions and the inevitable post-recession bounce-back.