As the world continues to pick up its pieces after the devastating events caused by the COVID-19 pandemic, there are speculations among economists and investors that another recession could be around the corner. If so, this would be the first recession of America’s legal marijuana era.
Despite this, the push for legalization in the United States is in full swing. Although the sentiments towards the marijuana industry are currently bullish, many wonder how the burgeoning market will respond to a significant economic slump.
Could the steady income from venture capitalists, private equity funds, and other investment streams help the weed industry hold its own? Or will they dry up and bring the expansion of the industry to a sudden halt?
Since cannabis companies weathered the 2020 coronavirus-induced recession and emerged relatively unscathed, many marijuana enthusiasts believe the industry is recession-proof. Even so, things could be different this time around. There are numerous factors to consider when discerning how the sector would perform during economic turmoil.
The most straightforward response to this question is no. However, this conclusion is only based on the fact that no industry is entirely recession-proof. Recessions and economic downturns are inevitable parts of the economic cycle. Although the cannabis industry remained resilient during the COVID-19 disaster, the same may not be said for a recession.
When the Coronavirus was at its peak, cannabis sales grew by nearly 50%. While this was well received by the marijuana community, there are rising concerns that some companies may have overinvested in the budding industry. This could prove detrimental to stakeholders who exponentially financed the sector based on the success of cannabis during that period.
Analysts believe the cannabis sector survived the Coronavirus economic downturn because consumers were flush with cash from government stimulus checks and had fewer options for spending it. Since there were numerous restrictions on travel and social gatherings, many people gravitated towards cannabis for their anxiety and stress.
That said, the marijuana industry does look to be highly recession-resistant. A quick look at evidence from other vice industries, including tobacco and alcohol, can help paint a picture of cannabis purchases during an economic downturn.
According to reports, alcohol sales increased by 9% during the Great Recession. Alcohol consumption grew despite the rising unemployment rates. For this reason, the cannabis industry may continue to progress and generate revenue even during a recession.
Despite the tremendous growth of the cannabis market in the last few years, federal legislation is still seemingly out of reach. This stalling could be a thorn in the side since the federal decriminalization of weed is a significant factor in the industry’s survival and economic recovery in the event of a recession. The lack of progress for federal reform coupled with rising inflation could mean tough times are imminent for the weed sector.
Furthermore, it’s vital to remember that newer cannabis state markets like Florida, New Jersey, and New York still have limited licenses. Because of this, these marketplaces typically have less competition and comparatively higher dispensary supplies and wholesale cannabis prices. Experts believe these states are better positioned to handle an economic downturn than more mature markets like Colorado and Oregon.
Marijuana businesses in states with more mature cannabis industries face overproduction, falling wholesale prices, and stiff competition. Moreover, each state’s regulatory framework differs due to the lack of federal direction. Consequently, a recession could have various effects depending on the marijuana market of individual states.
Another potential headache for the cannabis industry during a recession is the resurgence of the illicit market. Since an economic downturn puts pressure on consumers’ wallets, many tokers could be driven to the illegal marijuana market for better prices. There’s no denying this would negatively affect legal cannabis and reduce market revenue.
The cannabis realm is vast, and investment opportunities go well beyond cultivation, manufacturing, and distribution. Organizations focused on research and development, accessories, services, and cannabis packaging companies have also become significant parts of the industry.
Due to the vast array of businesses that make up the cannabis sector, a recession may result in a diverse set of winners and losers. As a result, this could even out the industry’s performance in an economic crisis. It could even help poor-performing sectors in the industry remain afloat during and after a recession.
Moreover, let’s not forget that the performance of the marijuana industry is driven by economics, politics, and the generation of tax revenue. Market experts believe that these would be the determining factors if cannabis succeeds in putting on an excellent performance during a recession.
In fact, industry leaders believe that an economic downturn could be a principal catalyst for cannabis legalization at the federal level. Jurisdictions in the United States and abroad would want to take action to help the economy recover from a recession, and legalizing cannabis could be one of the popular options.
There’s no denying that no industry can remain recession-proof. However, based on the track record of similar sectors, there is ample reason to conclude that some cannabis companies and marijuana stocks could remain resilient during a recession. Still, these companies must evaluate their portfolios and adjust accordingly for a possible economic slowdown to stay afloat.