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Every year new buzzwords crop up in daily life. But what do they actually mean? We explain the jargon and breakdown a few of our favourites for 2020.
Negative interest rates
Governments tend to lower interest rates when the economy is suffering. The theory is that when businesses and people have cheaper access to money, it incentivizes them to invest and spend. Negative interest rates are an unconventional, and seemingly counterintuitive, monetary policy tool that was actually implemented by Sweden’s central bank in 2009. With negative interest rates, cash deposited at a bank is subject to a storage charge, rather than the opportunity to earn interest income; the idea is to incentivize loaning and spending, rather than saving and hoarding.
The “shapes” of recovery
After the initial economic shock from COVID-19, investors began looking down the road to what will happen with an eventual economic recovery. Some of that discussion was around the “shape” of the recovery. This term is used as an informal shorthand to characterize the rate of recovery after a recession and refers to the shape of the line in a graph of gross domestic product, or GDP. Here are some of the different shapes.
- A V-shaped recession is when there is a swift period of deep economic decline followed by a rapid recovery. This is a fairly normal shape for a recession, and the strength of the recovery is based on the severity of the recession.
- A U-shaped recession occurs when the trough is less clearly defined, with economic weakness occurring for several quarters before growth resumes.
- A W-shaped recession is when the economy dips, briefly rebounds, and then dips again before eventually recovering. This is called a double-dip recession.
- An L-shaped recession is a severe recession where GDP does not return to trend line growth for many years, if ever. This aligns with a long period of economic malaise or depression.
UBI
UBI stands for universal basic income, where all citizens get a standard paycheque every month from the government, without criteria or caveats. Proponents say it can cut administrative costs, stimulate the economy and reduce poverty, while detractors say it could cost taxpayers too much money and encourage people to stop working. When the COVID-19 pandemic and shutdown occurred, both the U.S. and Canadian governments implemented a rough form of UBI, with the introduction of stimulus cheques in the U.S. and the Canada Emergency Response Benefit (CERB) in Canada. *
Safe-haven assets
In times of turmoil, investors usually turn to "safe-haven assets," or those investments considered rock solid. While they may not return much, the hope is that their principal is protected. By parking their money in these lower-risk investments, investors hope to shelter themselves from volatility in the general stock market. Popular safe-haven investments are things like cash, gold, GICs, government bonds and dividend paying, large-cap defensive stocks in the banking, utility and consumer staple sectors.
