It’s no secret that the Canadian and global economy took a big hit in 2020 and we entered a recession. Obviously, the situation is “special” compared to previous recessions and for the moment we cannot accurately assess the final outcome. However, this recession will remain unforgettable in everyone’s memory! But what exactly is a recession? And how can you prepare yourself to get through a recession?
What is a recession?
An economic recession is a phase of at least two consecutive quarters of decline in the production of goods and services within a country. In other words, it is when the growth rate of the Gross Domestic Product (GDP) is negative. If growth is lower, economic activity is less dynamic and this causes a set of negative consequences for the whole economy. According to Statistics Canada, real GDP fell by 5.4% in 2020. U.S. GDP fell 3.5 percent from 2019, according to the first estimate from the U.S. Commerce Department. Click here to read more about the recession and here for the Canadian economy.
Recession and businesses
Industries such as air travel, automotive, tourism and hospitality will take years to recover from this particular recession. During a recession most companies experience a significant drop in sales. Consumers are saving rather than spending their money and companies are reacting by halting investment and hiring, and laying off employees en masse. All businesses are likely to be affected, but small businesses are usually the most affected.
Recession and stock markets
In times of recession, companies make less profit and this directly impacts their value on the stock market. Investors looking for reassurance then turn to less volatile assets (safe havens) like gold and silver, and we all see our portfolios decrease in value.
Recession and the job market
A recession has an impact on the activity of companies. They will lay off employees or at least stop recruiting. The number of unemployed people is increasing and fewer and fewer jobs are available, so the unemployment rate is rising.
The recession and real estate prices
Real estate prices tend to decline during a recession. There are normally fewer buyers and more sellers, which lowers prices. It can also be more difficult to get a loan from banks. For more information about how to get a loan click here.
Preparing for a recession
1. Reduce your expenses
No matter what happens or will happen in the global economy, you have the power to manage your budget and reduce your expenses. The result on your budget will be immediate and you will have more money available to apply the following tips and get through a recession. Remember, saving money doesn’t have to mean giving up on living and indulging yourself once in a while! Click here for simple steps to save!
2. Create or increase your emergency fund
An emergency fund is a sum of money set aside for financial emergencies and contingencies. A good estimate of the minimum amount for your emergency fund would be 3 months of your essential expenses. It allows you to face adversity quickly and without creating additional anxiety. This “reserved money” helps you get through a recession with much less anxiety. If you already have an emergency fund, increase your savings. During a recession, the risks of job loss, depression, illness, price increases, etc., are higher.
3. Analyze your fixed expenses
A complete analysis of your fixed expenses will prevent you from having late payments before entering a recession. If you lose your job, you’ll be glad you’re not adding late payment fees or insufficient funds to your financial situation. Click here for more information on this topic.
4. Pay off your debts
What is the cost of debt? The interest rate. The higher the interest rate, the higher the cost of the money borrowed. If possible, get rid of the most expensive debts. Postpone major purchases that need to be financed and save to build up your emergency fund. Click here for tips on how to pay off debt!
5. Maximize your professional potential
One of the major risks in a recession is losing your job. You can’t secure your job 100% but you can increase your professional potential.
- Update your professional knowledge and skills. What skills are most sought after in your industry? Stay up to date. If you were to suddenly change jobs, what would companies look for in hiring you?
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Apply for a quick loan for your online training
- Keep your resume up to date. Update your resume on all web-based platforms where it appears. Add any new training you take as you go along. This will make your job search faster and more efficient in time and place.
- Make yourself indispensable When a company is forced to lay off employees to get through a recession, it is the least important jobs that are eliminated first. Think about what your immediate supervisor is looking for. Do you have professional qualities that are valuable to your company? Do you complete the work you have to do within the required time? Do you have skills that cannot be found elsewhere? Do you work on projects that could not be entrusted to anyone else? etc.
- Strengthen your professional network. Make sure you have good relationships with people in other companies in your field, even if they are competitors. The better your network, the easier it will be to bounce back and find a new job quickly.
- Find an additional source of income. To increase your ability to save, click here for ideas on how to complement your income.
6. Don’t panic
An economic downturn announces potentially stormy weather, but there is no need to panic. It is important to think with a cool head and not jump into investments that are too volatile, nor withdraw all your savings from the stock market.
- Never sell in a declining market. People get emotional and give in to fear when they see the value of their investments decreasing and they sell their shares. This loss is a loss only if you sell your shares. Hold on to your investments and let the markets calm down and go back up. Even a well-established corporation can see its stock price drop significantly during a recession. You have to wait until you get through a recession before you sell, which is why it’s important to have an emergency fund of cash and uninvested money.
- Meet with your financial advisor. It is very important to understand your investments before a recession. Make an appointment with your financial advisor to review the risk level of your portfolio if you are in the disbursement phase, for example in retirement or soon to be retired. You need to plan any necessary adjustments now to “secure your future”.
By following this advice, you can rest easy knowing that you will be able to get through this recession as well as the others. The economic cycle is exactly that, a cycle! It has its ups and downs!