Understanding Recession And Preparing For It

When Canadian economic activity declines rather than increases, a recession has occurred. Increased unemployment and decreased consumer expenditure are frequent side effects of recessions.

A recession for Canada and many other nations is unavoidable given the state of the global economy. Even though this scenario is not exceptional, certain conditions are unique, so it’s crucial to keep the whole picture in mind while considering how a recession can affect you.

How Does a Recession Unfold?

Businesses are compelled to curtail employment, fire employees, and shorten working weeks during a recession. Tens of thousands of Canadians would lose their jobs or have their hours cut if a recession occurs.

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A large portion of these job losses will be concentrated in the service industry, especially in the gig economy, where wages tend to be lower and employment is unstable.

People who experience a loss of income must use their savings, if any, to cover basic expenses like food, housing, and transportation. Therefore, the largest effect of a recession is the possibility of job losses or decreased hours of work, and this is the outcome for which most people should be prepared.

Methods to Getting Ready for a Recession

Set Up a Budget

Before you can do anything else to be ready for a recession, you must know how much you make and where that money goes. You can make a budget in just a few easy steps, however, it could take some time. Regularly review your budget and make any necessary adjustments.

Get Rid of High-Cost Debt

Even if it’s easier said than done, now would be the ideal moment to pay off your outstanding credit card debt. The Federal Reserve is hiking interest rates, which will lead them to rise even more. That won’t instantly influence your credit card, but it will gradually.

It might seem like you’re pouring water into a bucket with a huge hole at the bottom when you’re trying to pay off high-interest debt. You might attempt to take out a lower-interest loan to pay off your higher-rate debt or transfer part of it to a no-interest credit card that you can pay off fast to break that painful cycle.

Not that you need any more motivation to pay off your credit card debt, but here is one more: During recessions, credit card issuers may reduce your credit limit without prior notice. If you have a balance, this might lower your credit score. So, make paying off that debt a top priority.

Boost Your Credit Score

During recessions, lenders often impose stiffer criteria for mortgages, auto loans, and other forms of lending. If you need to apply for a loan because of financial difficulty, you’ll need strong credit and/or a bigger down payment to get accepted.

By paying your bills on time and limiting your credit use, you may raise your credit score. Consider a secured credit card if you need to develop or rebuild your credit.

Spend Less Overall, Especially on Non-Essentials

Utilize this chance to reassess your spending plan and think again about little, everyday spending patterns. Consider bringing your lunch each day rather than purchasing one. 

Rethink any monthly subscriptions that are deducted automatically from your account. It’s a perfect moment to justify your expenditures and reevaluate your spending plans.

Establish Numerous Sources of Income

During a recession, anything may happen: your business might start firing more employees than normal or start making sudden layoffs of personnel without warning. You may wish to work for yourself at least once, which allows you to choose your hours and raise or lower your payments as needed each year without fear of being fired. 

For self-employed people, the first three to five years are often difficult, but if you stick with it, it’s far simpler to become rich in the long run.

Try to Transition to a Recession-Proof Job

Depending on skill levels, employment in the government, health care, and education seem to be the most recession-proof. Of course, not everyone is suited for these positions.

Each individual should think about possibilities that fit with their tastes and skill set. When your abilities and résumé are up to date, you are well-prepared, and this method is far more effective.

Avoid Selling Off Your Investments

You may be thinking about withdrawing from the market or reducing your 401(k) contributions in light of recent market volatility. But it’s crucial to control your emotions and keep in mind that you’re doing this for the long haul.

Making an investing choice in a panic or while you’re terrified is never a good idea. To make sane judgments, you must attempt to take a step back from them.

Is There Now a Recession In Canada?

Not quite yet, according to the professionals. However, the Royal Bank of Canada has anticipated a “mild” recession for 2023.

Usually, the best strategy to combat inflation is to hike interest rates, but doing so excessively runs the risk of plunging Canada into a recession. As is well known, the Bank of Canada recently increased interest rates by one full point to 3%, and another increase is anticipated before the end of 2022.

Central banks in Canada and throughout the world are actively raising interest rates to limit consumer demand and combat inflation. 

Much of the price pressure in Canada is coming from beyond our borders, as energy and food costs rise due to supply chain snarls caused in part by the Ukraine war. Strong domestic demand for housing and services has exacerbated these pressures, and the labor shortage is pushing up salaries. 

The Canadian unemployment rate is now almost a full percentage point lower than RBC’s long-run neutral (non-inflationary) estimate. As the economy contracts next year, that rate will almost certainly jump another ½ percentage point to 6.6%.

This is the only reason why we can say that there is no recession in Canada yet, but most likely it will happen shortly.

Conclusion

Unfortunately, our current economic system often experiences recessions. The good news is that you already have the information and tools necessary to be ready for them. 

You may review your finances during a recession and make adjustments while avoiding the harshest effects of a momentarily weak economy with a little forethought and self-control.