How to prepare for a possible recession in Canada

The next time the Bank of Canada (BoC) raises interest rates on its scheduled September 7, 2022 date, it could potentially trigger a recession.

Searing inflation has been the story of 2022, and the BoC is stuck between a rock and a hard place – trying to control inflation by raising interest rates, which then runs the high risk of a downturn. economic.

While we may not enter a recession and the Bank of Canada is still hoping for a soft landing, it is best to be prepared.

WHAT IS A RECESSION?

When many people think of a recession, they may think back to the global financial crisis that happened in 2008 and the chaos that followed. However, recessions are not always so dramatic and can vary in severity.

There are many different definitions of what a recession is, but a simple one is given by the National Bureau of Economic Research (NBER):

A recession involves a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months. It can affect several aspects of the economy, such as real GDP, income, industrial production, employment, retail sales and industrial production.

GDP is an important indicator of the potential direction of the economy. Current statistics show that Canada’s GDP is on the verge of stagnation and has changed very little recently (0% growth between April 2022 and May 2022).

HOW YOU CAN PREPARE FOR A RECESSION

Recessions aren’t just bad for business; they are bad for everyone. During a recession, it is common to see rising costs associated with job cuts, wage cuts, stock market declines and reduced income security.

It’s a good idea to start preparing now for a recession so you don’t get caught off guard. Here are some practical tips you can use to make sure you’re prepared for the impending market downturn.

1. Evaluate your current investments

The main question you should try to understand when looking at your investments is: “How much risk am I exposed to?” ยป Depending on where your assets are, try to get an overview of what you have and what your potential losses could be. You may need to review your self-directed financial statements, contact your financial advisor, or assess your workplace pension plan.

This will have a lot of variation between different people. For example, if you invested 100% in Canadian stocks, consider worst-case scenarios, such as during the 2008 financial crisis, when the TSX index fell 35%.

The next question you should ask yourself is, “Am I willing to accept this risk?” If the answer to this question is no, it means that your risk tolerance may not match your investments well and you might want to consider adjusting it. Some de-risking strategies invest more in fixed income, cash, or stocks in more stable sectors (like utilities).

If you don’t know what your current risk tolerance is, consider taking an investor questionnaire.

2. Reduce your monthly expenses

When a recession hits, the first thing businesses do is cut overhead. They can cut department funding, suspend salary increases, and avoid unnecessary maintenance.

Consider doing the same at home.

First, sit down and look at your monthly budget. It helps to have a complete view of all your family’s expenses, including rent, mortgage, utilities, groceries, fuel, and entertainment.

Chances are you’ll find areas where you can reduce your spending. Assess the three big expenses in your budget: housing, transportation, and food. See if there is a way to narrow any of these areas.

During a recession, the probability of losing one’s job is higher. If you’re a business owner, you might find that fewer customers renew their contract or fewer buyers buy your products. This can tighten your personal finances and make it difficult to pay bills.

During these times, having an emergency fund is essential. I hope you won’t have to use it. If the worst happens, at least you’ll have it there to help you out unscathed.

3. Harness your most valuable skills

During a recession, it’s important to continue to deliver value. If you’re an employee, try to hone your skills and become the best at what you do, so you’re least likely to be fired if there are strings of layoffs. If you run a small business, focus on being the best in your industry and providing exceptional service to your customers.

When money is tight, individuals and businesses will continue to invest in the people and products that bring them value.

FINAL THOUGHTS

There’s no way to predict exactly how long a recession will last, but we can look to history to give us a rough idea. Canada has only experienced five recessions since 1970, and they have typically lasted three to nine months. Unfortunately, there is little we can do to prevent a recession. By preparing in advance, we can limit the ability of a recession to hurt us financially.

If you are smart with your money, increase your value, save where you can, and eliminate unnecessary spending, you will be able to survive and maybe even thrive during a recession.

Christopher Liew is a CFA charterholder and former financial advisor. He writes personal finance advice for thousands of Canadian readers daily on his Wealth Awesome website.

Do you have a personal finance question, tip, or article idea? Please email us at dotcom@bellmedia.ca.

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