After having resisted recession fears in 2023 and 2024 fairly well, the European economy is once again facing a difficult context. Growth remains weak in several countries, notably Germany, while the return of inflation and the rise in energy prices weigh on economic prospects. In this context, investors are wondering: should we fear a recession again in the coming months? While it is impossible to answer this question with certainty, it is possible to prepare for it.
In this article, we will revisit what a recession is, the mechanisms that can trigger it, and the major economic crises that have marked recent history. We will also see how to manage savings and investments in a slowing economy, as well as the assets likely to better withstand uncertainty when markets become unsettled.
What is a recession?
The term “recession” regularly appears in major headlines of the economic press when concerns about the macroeconomy intensify.
However, even though everyone knows it is a negative event for the economy, it turns out that not everyone understands exactly what it is. Let us therefore take the time to detail what an economic recession is.
Definition of a recession
A technically recession is generally characterized by two consecutive quarters of GDP decline (Gross Domestic Product).
Conversely, an economic slowdown corresponds to a slowing growth rate without the economy necessarily tipping into negative territory.
For example:
- if a country’s growth goes from +2% to +0.5%, it is a slowdown.
- if GDP falls by -0.2% then -0.3% over two consecutive quarters, we speak of a technical recession.
More broadly, a recession denotes a period during which economic activity contracts. Employment, industry, trade or investment slow down, which typically ends up weighing on household consumption.
A recession should not be confused with degrowth, even if the two concepts may seem close at first glance. A recession is an involuntary, unforeseen phenomenon generally considered detrimental to the economy. Degrowth, on the other hand, is more of a voluntary approach aimed at reducing certain economic activities to limit their environmental or societal impact.
Finally, a recession usually affects the entire economy, whereas degrowth can concern only certain specific sectors.
What triggers a recession?
All economic factors must be well balanced for a country’s economy to function properly. Recessions are triggered by an imbalance of these factors. Before a recession, one often finds a triggering event, such as a stock market crash, a banking crisis or a major geopolitical shock, which starts a vicious circle gradually steering the economy toward a phase of negative growth.
Among the factors most often at the origin of a recession, one finds :
- a sharp rise in the price of commodities or energy ;
- a financial or real estate bubble ;
- an abnormal increase in unemployment ;
- inflation that is too high and persistent ;
- over-indebtedness of businesses and/or households.
When one or more of these factors deteriorate sharply or durably, the risk of a recession increases.
Recession and economic depression: what’s the difference?
When a recession lasts for several years, we speak of an economic depression. The term depression is often associated with the Great Depression of the 1930s.
What characterizes a depression is that a recession is significant and long-lasting.
Conversely, when economic activity continues to grow but at a slower pace than before, it is generally called an economic slowdown rather than a recession.
Should we fear a recession in 2026?
For several years, recession forecasts have come and gone without always materializing. Western economies have notably held up better than expected to inflation shocks and the rise in policy rates observed after the health crisis. Yet, the economic environment remains fragile. In Europe, growth struggles to regain momentum and some countries, such as Germany, are going through a particularly difficult period.
The return of inflation, higher energy prices and the numerous geopolitical tensions observed since the start of the year also sustain an atmosphere of uncertainty. Should we interpret this as the early signs of a new recession? Not necessarily.
Today, most economists anticipate more a scenario of weak growth than a genuine contraction in activity.
However, prudence remains warranted. Economic history shows that downturns can sometimes evolve faster than expected when several negative factors accumulate. For investors, the challenge is not to predict with certainty the next recession, but rather to ensure that their wealth is able to withstand different economic scenarios.
France in recession? The current economic context in France
Is France in recession? At this stage, the answer is no. That said, the French economy is not going through its most dynamic period. Growth remains weak and GDP even fell slightly in the last quarter. Nothing alarming in itself, but it confirms that economic activity has been slowing down for several months.
All is not negative, however. The labor market still holds up relatively well despite an unemployment rate above 8%, and inflation around 2.4% remains well below the peaks reached after the Covid-19 crisis.
However, households and businesses must now cope with a return of tensions on interest rates. After several years of decline, ECB rates recently rose from 2.15% to 2.40% and could continue to rise if inflation keeps surprising to the upside. This trend tends to weigh on credit, and thus on certain consumption, investment or real estate purchase projects.
France shares much of these difficulties with its European neighbors. Growth remains weak in many countries, industry shows signs of slowing, and the return of inflation complicates the task faced by central banks. In this context, the most probable scenario today is not a deep recession, but rather an economy that advances slowly, without a real growth engine.
For the coming months, it will be essential to monitor the evolution of employment, household consumption and business investment. These indicators often show whether a simple slowdown could turn into something more serious.
Analysis of previous global recessions
Global industrial production indicator since 1919
The 1929 economic crisis
Over the past century, the global economy has gone through numerous periods of recession, some of which left a lasting mark on economic history. The most famous remains undoubtedly the one that followed the 1929 crash and gave birth to what we now call the Great Depression. The Dow Jones lost almost 90% of its value during this period known as the “Great Depression,” which was accompanied by a severe banking crisis leading to the bankruptcy of several thousand American banks.
This difficult period was preceded by a phase of very strong growth during the 1920s decade.
The 1929 crisis also spawned a powerful deflation (general fall in prices) coupled with an explosion of unemployment. It exceeded 20% in the United States and reached about 25% in 1933. It was Franklin Roosevelt’s New Deal, signed in 1933, that helped pull the economy out of this slump.
The crisis linked to the bursting of the Internet bubble
Among the most notable recessions in recent history is the one in the early 2000s, triggered by the bursting of the Internet bubble (known as the dot-com bubble).
By the late 1990s, the web’s rise created immense enthusiasm among investors. Hundreds of Internet-related companies were listed on the stock market, and their valuations soared, often without relation to their financial results or their real ability to generate profits.
Over time, markets realized that many companies would never be able to justify the valuations assigned to them. Confidence vanished as quickly as it had appeared, leading to a collapse of the tech sector. Only those companies with a real business model managed to survive and continue to develop, such as Amazon.
From March 2000, at the peak of the speculative bubble, to October 2002, the Nasdaq index lost nearly 80% of its value, illustrating the magnitude of one of the most significant stock market corrections in modern history.
The subprime crisis
Eight years after the Internet bubble burst, the global economy was struck by another major recession: the 2008 financial crisis.
This crisis originated in the US housing market, with the development of subprime mortgages—loans granted to borrowers with a high risk of default.
For several years, housing prices continued to rise, masking the fragility of the system. Many financial institutions extended risky credit, convinced that housing prices would keep rising indefinitely. When interest rates began to rise and housing prices stopped climbing, many households found themselves unable to repay their loans.
The situation worsened dramatically with the bankruptcy of the American bank Lehman Brothers in September 2008. This event triggered a broad loss of confidence within the global financial system and accelerated the spread of the crisis to the entire economy.
Millions of Americans then lost their homes to foreclosure, while many financial institutions had to be bailed out or restructured. This crisis led to a substantial strengthening of banking regulation and capital requirements to make the financial system more resilient to future shocks.
The recession caused by the Covid-19 pandemic in 2020
The 2020 recession holds a special place in recent economic history. Unlike previous crises, it was not triggered by a speculative bubble, a banking crisis or a petroleum shock, but by a global health crisis. To limit the spread of Covid-19, many governments implemented lockdown measures that significantly slowed, or even disrupted, portions of economic activity.
Entire sectors, such as tourism, hospitality, dining and air travel, were hit hard. Financial markets also experienced a sharp correction as investors feared a prolonged halt of the world economy.
In response to this exceptional situation, central banks and governments acted quickly by implementing massive support plans. Interest rates were kept at historically low levels while thousands of billions of euros and dollars were injected into the economy to support businesses and households.
Although this recession was particularly brutal, it was also one of the shortest in modern history. By 2021, the economic recovery was supported by the gradual lifting of health restrictions and the stimulus measures deployed in many countries.
What to do with your money in a recession?
The “black” scenarios of an economic recession are not a synonym for “the end of the world,” because recessions or depressions are usually followed by periods of strong economic growth.
There are, however, a few measures to take if you want to get through a recession without too much trouble.
Keep your funds safe
Let’s be honest, in a recession some companies will survive and others will go bankrupt. The same goes for banks, brokers and insurance companies. It will therefore be important to keep your funds safe.
Several measures can be taken to protect yourself:
- spread your liquidity across several bank accounts;
- take out several life insurance policies, rather than just one;
- prefer capital-guaranteed investments (Livret A and savings accounts);
- check that your deposits remain covered by bank guarantee mechanisms;
- avoid concentrating all your financial assets with a single institution.
It is advisable to imagine the worst-case scenario in the choices you will make to preserve your money. Of course, the worst-case scenario may never occur, but this approach ensures you won’t be caught off guard by an unexpected event.
Having an emergency fund
As is often said, you should not invest in the stock market with money you need to live on. However, to weather a recession period you may need more money than usual.
Unforeseen events such as job loss or price increases could impact your daily life. To avoid being forced to sell your shares or ETFs at the worst possible moment to face these contingencies, you should set aside an emergency fund that you can use to weather the crisis.
If you have rental income, it could fall or disappear, and you should plan for that as well. Being obliged to sell your real estate investment at the worst possible moment could have negative consequences for your finances.
Generally, it is recommended to have a precautionary savings reserve to cover your living expenses for a period of 3 to 6 months.
Plan a crisis budget
The crisis can also create good opportunities in financial markets. It would be a shame not to be able to capitalize on them simply because all your liquidity is already invested.
Without necessarily trying to anticipate the next crash, it can be wise to keep a small cash reserve, for example between 10% and 20% of the amounts typically allocated to investing. This margin makes it easier to seize opportunities that may arise during periods of high volatility.
Great investors like Warren Buffett have often taken advantage of crisis periods to strengthen their positions when markets were under pressure.
Keep or exit your investments?
Many investors wonder whether to keep their investments when a recession is announced. In fact, you will mainly need to rethink your investment strategy.
Generally, there isn’t necessarily a valid reason to sell investments offering guaranteed capital and/or guaranteed rates.
Regarding investment funds, it would be wise to learn how the manager plans to weather the recession, and what will be their strategy.
As for your stock investments, it may be necessary to revisit your portfolio allocation. It is generally advised to set aside growth companies to focus on defensive stocks, in particular the consumer staples sector.
For investors using index ETFs in a long-term approach, recession periods are often more associated with volatility than with a challenge to the investment strategy.
A recession context does not mean that all companies and firms are in danger. Even if most experience declines in revenue, they can still remain profitable and thus generate earnings.
Moreover, the example of the 2008 crisis following the subprime financial crisis is a good illustration, since a large portion of companies managed to earn profits and even pay dividends despite a context of economic, financial and stock market crisis.
Repaying your debts?
Debt can become a very heavy handicap when the situation turns sour. If you have the funds to repay your debts, don’t hesitate!
The best investment in a crisis is not to have debts that would complicate an already difficult situation. If your income sources could be reduced, you must anticipate and cut your expenses.
A small caveat, high-interest debts or consumer loans are usually worth prioritizing for repayment. Conversely, a mortgage with a particularly advantageous fixed rate does not necessarily constitute an emergency.
Diversifying investments
Diversifying your investments is essential in a recession. While it is always prudent to diversify, it becomes crucial when a crisis is announced.
You will especially need to think about geographic diversification.
How to invest in a recession?
Investing in real estate during a recession
Real estate is the preferred investment of the French, and the decades past have proven them right, as real estate has preserved and increased its value over time.
Annual evolution of real estate in Paris and in France since the 1900s
The curves showing the evolution of real estate prices in Paris (red curve) and in France (blue curve) show strong growth over the very long term.
Real estate allows you to “sleep soundly” because it is subject to less volatility than certain assets, such as stocks for example.
Note: investing in major stock indices on average over the past decades has yielded a better return on investment than real estate. But it comes with higher volatility.
Be careful, however, with rental real estate and bank debt. The rise in rates could put you in a difficult situation, and the loss of rental income is possible.
In a recession, or even an economic depression, the best real estate investment is buying your primary residence.
Comment by Marc:
The major wealth transfer expected over the coming decades could deeply transform the real estate market. Several trillions of euros will have to change hands as inheritances, but it is mainly millions of dwellings from inheritances that could be sold, with the potential to trigger a substantial drop in prices.
Investing in gold during a recession
Gold is an interesting investment to secure one’s savings, and the long-term evolution of the gold price speaks for itself.
Evolution of the price of an ounce of gold since 1915
Gold is often presented as a safe-haven asset capable of protecting investors during crises. This reputation is not entirely unfounded. Over the long term, the yellow metal has indeed managed to preserve its purchasing power and to weather the major economic, monetary and geopolitical turbulences of the past century. This is also why central banks continue to hold large quantities in their reserves.
Nevertheless, investing in gold is not a guarantee of performance. The previous chart shows that its evolution has been far from linear. Some periods were particularly favorable, while others were marked by long years of stagnation, or even declines in real terms after accounting for inflation. An investor who bought gold at the 1980 peak, for instance, would have had to wait nearly three decades to recover their initial investment.
This reality is especially important to bear in mind as gold today trades at historically high levels. If the precious metal can still benefit from a context characterized by geopolitical tensions, rising state debt or inflation fears, its future path is unlikely to be a smooth one. Like any financial asset, it can experience significant correction phases.
Gold can therefore have a place in a portfolio during a recession or period of economic uncertainty, but more as a diversification tool than as a miracle solution. Relying exclusively on the yellow metal would ignore the fact that in the past it has endured long periods during which it offered little to no real return to holders.
Managing stock investments during a recession
Periods of economic recession almost invariably accompany stock market crises. When assets are often “on the floor,” it can be worthwhile to focus on shares of quality companies with, ideally, a long track record.
Indeed, a company with several decades of existence, or even a century for some, has undoubtedly weathered many crises of different kinds and survived.
The declines in equity valuations driven by recessions can therefore become bargains for investors, provided that one favors high-quality business models, with several key criteria:
- consistent earnings over the long term;
- reasonable financial leverage;
- ability to pay a durable dividend over time;
- growth of results over time;
- size of market capitalization;
- solid competitive position in its sector.
If the recession is severe, it is also possible to show a small margin of tolerance because earnings can be impacted. If they remain moderate and, in return, market valuations are falling sharply due to a stock market crash, it may then be interesting to take a position “at a bargain” with a view to long-term stock market investing.
Prefer companies with a long history (and thus that have survived many crises), meeting the above criteria, of substantial size, and preferably leaders in their sectors.
Unlike banks or insurance companies that mainly hold financial assets, a commercial or industrial company, by nature, has physical productive assets such as factories, industrial machinery, inventories, power plants, land, etc. Even in the context of major crises of a financial, banking, monetary, health or other nature, physical assets remain real and people’s needs (to eat, to shelter, to move) remain present.
Nevertheless, it is important to realize that during recessions, stock market volatility can be substantial. Even a century-old and economically viable company can see its stock price fall sharply during crises/recessions. You must therefore have strong nerves and bear in mind that in every crisis in history, periods of recovery and growth in the economy, as well as rising stock prices, have followed.
How to invest in the case of stagflation?
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