Recession: Will Perception Become Reality?

Equities globally have been selling-off on growth concerns. Economic activity is moderating from the higher pace experienced earlier this year, and investors are asking themselves whether this is just a slowdown or perhaps something more significant.

The word ‘Recession’ is coming up much more frequently in discussions these days. The possibility of recession is clearly on people’s mind – see how the number of Google searches for the term ‘Recession’ has jumped in recent weeks:

Source: Google Trends

A growing concern is that if people were to increasingly adopt the view or perception that we are heading into a recession – adopt it in a way that would impact their economic behaviour – we may in fact find ourselves in a recession. George Soros focused on this phenomenon in his “Theory of Reflexivity”: Distorted views can influence the situation to which they relate because false views lead to inappropriate actions. There is a feedback loop from reality to perception, and then from perception back into reality. For example, if companies wrongly believe that we are going into a prolonged period of economic stagnation, they could decide to delay their capital expenditure programs. If they do, growth will be negatively impacted. Same with consumers who could, given a misinformed perception of difficult times ahead, suddenly decide that it is wise to start saving rather than spending their income. If everyone were to stop spending and investing, the economy would grind to a halt. We should be careful that through our own actions we don’t bring the recession upon ourselves.