Six ways to prepare for the next recession

Faced with the current cost-of-living crisis, many Canadians are wondering when the next recession will occur and worrying about the state of their finances. Here are six tips to follow from two university professors, Walid Hejazi and George Georgopoulos, for dealing with the recession.

ANALYSIS – Despite appearances, and this is what many people believe, we are not yet in a recession. A recession is defined as two successive quarters of negative GDP growth, but it is essentially a period when economic growth drops significantly with an increase in the unemployment rate.

Due to the lack of a precise definition, it is not always agreed that an economy is in recession. In Canada, the government has not made any recent statements, but the CD Howe Institute, a Canadian non-profit policy research organization, tracks recessions independently.

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

Galloping inflation

Economists are unanimous in believing that a recession is likely to occur in 2023. This prediction is largely explained by the vigorous raising of interest rates by central banks around the world to fight inflation.

Inflation rates — the rate of increase in the prices we pay for goods and services — have reached levels not seen in four decades. High inflation rates are affecting purchasing power and people are finding it increasingly difficult to afford basic necessities, such as groceries. Inflation also has negative repercussions on economic efficiency, leading to an overall decrease in growth.

When interest rates rise, it becomes more difficult to finance the purchase of larger assets, such as cars, homes and vacations. Rising interest rates make any purchase that requires financing more expensive.

Existing debts with variable interest rates also increase the cost of carrying these debts. Consequently, the demand for many goods and services decreases, and so does inflation.

What happens during a recession?

During a recession, businesses are forced to cut back on hiring, lay off workers, and cut working hours. If a recession hits, tens of thousands of Canadians will be out of work 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 loss of income means people have to dip into their savings — assuming they have any — to pay for essentials like food, housing and transportation. Potential job losses or reduced working hours are therefore the greatest consequence of a recession; most people should be prepared for this.

With a recession looking imminent, many Canadians are understandably worried about the state of their finances. Here are six tips to follow to deal with it:

  1. Reduce your expenses immediately, especially those on non-essential items. Take the opportunity to review your budget and reconsider the daily shopping habits that are multiplying. Rather than dining out every day, consider preparing a meal. Review these subscriptions that are automatically deducted from your account each month. This is the perfect time to analyze and justify your buying habits, and to revise your budget.
  2. Pay off your credit card debt now. It is 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, which will make debt management more difficult. Lower balances help reduce the amount of interest payments during any period of income or job loss, making it easier for the portfolio to weather tough times.
  3. Pay close attention to paying bills and avoid late fees. These fees also accumulate over time. Make a plan to make sure bill payments are made on or before 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 ready to look for a job. In the event of dismissal, be prepared to find another position quickly.
  5. Become more employable. As recessions generally hit people with less experience and less qualifications the hardest, you should update your professional skills. Explore virtual options that offer excellent upskilling opportunities, or face-to-face training at colleges and universities across the country, to further your education and increase your skills.
  6. If possible, try to get a recession-proof job. The jobs best suited to an economic downturn depend on skill level, but are generally found in the public sector, healthcare and education. Of course, these jobs are not for everyone. Everyone should consider options that match their abilities and preferences. This strategy is much more effective when your skills and resume are up to date and you are well prepared.

Plan for the worst, hope for the best

Some of these strategies are easier to implement 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 known as the business cycle, which describes the ups and downs of the economy. They usually occur once a decade and sometimes more often.

People should always be well prepared for such downturns. It is much easier to apply the above strategies well before a recession, rather than waiting until the last moment. The closer we get to a recession, the more difficult it is to prepare well by applying these strategies.

Even predicting the blow, recessions can be very painful to live with. But the good news is that they don’t last forever. The only thing we can do is plan for the worst and hope for the best.

Walid Hejazi, Professor of International Business, Rotman School of Management, University of Toronto and George Georgopoulos, Associate Professor, York University, Canada.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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