6 ways Canadians can prepare for the next recession

While it certainly seems like it, and many people believe it, we are not in a recession yet. While a recession is defined as two successive quarters of negative GDP growth, it is essentially a period when economic growth drops significantly and unemployment rates rise.

In the absence of a precise definition, there is not always complete agreement on whether an economy is in recession. In Canada, the government has made no recent declarations of a recession, but the CD Howe Institute, a Canadian not-for-profit policy research organization, tracks recessions independently.

According to the Institute, the most recent recession began in March 2020 at the height of the first wave of COVID-19. The Institute declared the recession over in August 2021. The current cost of living crisis has many Canadians wondering when the next one will be.

Rampant inflation

The general consensus among economists is that a recession is expected to occur sometime in 2023. This expectation is largely due to aggressive interest rates that central banks around the world have raised to fight inflation.

Inflation rates – the rate of growth in the prices we pay for goods and services – have reached levels not seen in four decades. High inflation rates negatively impact purchasing power and make it harder for people to buy basic necessities, such as groceries. Inflation also has a negative impact on economic efficiency, leading to an overall decline in growth.

Inflation has pushed up the cost of living for many Canadians by impacting the cost of gas, food and rent.

When interest rates rise, it becomes more expensive to finance the purchase of larger items, such as cars, homes, and vacations. Any purchase that requires financing becomes more expensive when interest rates rise.

When existing debts have variable interest rates, the cost of carrying those debts also increases. Due to these increases, the demand for many goods and services decreases, as does inflation.

What happens in a recession?

During a recession, companies are forced to cut hiring, lay off workers and reduce working hours. If a recession hits, tens of thousands of Canadians will find themselves unemployed or have their hours reduced.

Many of these job losses will be concentrated in the service sector, particularly in the gig economy where incomes tend to be lower and employment is precarious.

A man wearing a mask carrying a box of belongings past a row of cubicles
A recession will result in job losses for many Canadians.

A loss of income means people have to dip into their savings – assuming they have any – to pay for essentials such as food, housing and transport. The potential for job losses or reduced working hours is therefore the biggest impact of a recession and the consequence for which most people should be prepared.

How to prepare

With a recession looking imminent, many Canadians are understandably worried about the state of their finances. In anticipation of a recession, here are six tips Canadians can follow to prepare for a recession:

  1. Reduce expenses immediately, especially expenses for non-essential items. Take the opportunity to review your budget and reconsider daily spending habits that add up. Rather than buying lunch each day, consider packing a lunch. Reconsider the subscriptions that automatically go out of your account each month. This is the perfect time to streamline and justify your spending habits and review your budgets.

  2. Pay off your credit card debt now. It’s important to pay off high-interest debt as much as possible, as soon as possible. Over the next few months, interest rates will continue to rise, making debt management more difficult. Lower balances allow for a lower level of interest payments during any period of income or job loss, making it easier to get through financially difficult times.

  3. Pay close attention to bill payments and avoid paying late fees. These fees also accumulate over time. Develop a plan to ensure that bill payments are paid by the due date. Paying bills late leads to monetary penalties, which you always want to avoid, but especially during a recession.

  4. Be prepared to lose your job. Make sure your resumes and cover letters are up-to-date and you’re job-ready. In the event of job loss, be prepared to find another at any time.

  5. Become more hireable. Since recessions generally hit people with less experience and fewer skills the hardest, you need to keep job-related skills up to date. Explore virtual options that offer great upgrade opportunities, or in-person offerings at colleges and universities across the country, to further your education and skills development.

  6. If possible, try to switch to a recession-proof job. The most recession-proof jobs depend on skill levels, but tend to be in the public sector, health care and education. Of course, these jobs aren’t for everyone. Each person should consider options that suit their skills and preferences. This strategy is much more effective when skills and resumes are up to date and you are well prepared.

A man interviewed virtually on a computer
Be ready to start looking for a new job in case you are laid off.

Plan for the worst, hope for the best

Some of these strategies are easier to apply than others. But perhaps the biggest lesson of all is to always prepare for the worst. Recessions, or economic downturns, are part of what is called the business cycle, which describes the ups and downs of the economy. Recessions usually occur once a decade and sometimes more often.

Individuals should always be well prepared for such downturns. It is much easier to pursue the above strategies long before a recession, rather than waiting until the last moment. The closer a person gets to a recession to pursue the above strategies, the harder it is to be fully prepared.

Even if you plan ahead, recessions can be terrifying to experience. But the good news is that recessions don’t last forever. The only thing we can do is plan for the worst and hope for the best.

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