With constant whispers about a possible recession, the best thing you can do is plan rather than panic. It’s important to always plan ahead for the possibility of an economic downturn.

Let’s discuss everything from what a recession is, what to expect during an economic downturn, and how to plan to be financially safe and sound. Taking proactive steps to prepare for a recession can help mitigate its impact on your finances.

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Key Takeaways

• Recessions are temporary periods of economic decline, typically shown through 6 consecutive months of GDP decline.
• Unexpected economic events, inflation, high interest rates, and asset bubbles can cause recessions.
• To plan for times of uncertainty, you can reduce spending, pay down debt, and increase emergency funds to help weather an economic downturn.

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What Is a Recession?

A recession is a temporary period of economic decline expected as part of the business cycle. A recession is defined as 6 months or 2 consecutive quarters where an economy’s Gross Domestic Product (GDP) significantly declines. When the economic decline is minor, and the downturn doesn’t significantly impact the economy, this is known as a technical recession. Recessions vary in length and severity; however, they typically last between 2 to 4 quarters or 6 months to 1 year. 

Historically, there have been warning signs of an imminent recession. An inverted yield curve is usually a recession signal and is often a warning sign before recessions occur. A yield curve inverts when short-term bonds have higher yields than long-term bonds. 

For example, if a 2-year bond currently has higher yields than a 10-year bond in Canada, this indicates that the yield curve is inverted. This could be a warning sign that a recession may soon occur. 

Typically, the early warning signs of a recession include high inflation, rising interest rates, rising unemployment, and economic uncertainty. This leads to declining consumer confidence, which slows spending and the economy. 

When consumer spending declines, corporations are impacted, and profits may be lower than expected. This leads to declining investor confidence, which causes the stock market to decline as investors sell off stocks. 

Corporations, in turn, impose layoffs in response to lower consumer spending. Those laid off are forced to slow their spending as much as possible due to lost wages, adding further to the slowing economy.

What Causes a Recession?

Many economic events can contribute to a recession. Unexpected and unpredictable events like the pandemic can shock the economy and cause a recession. In March 2020, the COVID-19 pandemic caused a recession, as many businesses faced closures and restrictions.  

Inflation can contribute to an increasing cost of living that is too high for many households to afford, causing many to slow spending. This affects corporate profits, which leads to layoffs and falling stock prices. Deflation, where prices are ultra-low, means companies can no longer profit, leading to layoffs and falling stock prices. 

High interest rates can increase the cost of debts like mortgages and loans. Those facing higher rates are likely to cut spending as much as possible in other areas or may even default on their loans. The Bank of Canada uses high interest rates to help curb inflation, but this can also contribute to a recession. 

The unrealistic and sudden growth of critical assets called bubbles can lead to a recession when they pop. When these sectors, like the housing market, become overvalued, they create asset bubbles (“housing bubble”), and when they pop, much of the inflated value of the asset is lost.

Is Canada in a Recession Today?

A recession is defined as 2 consecutive quarters of declining GDP. Since GDP numbers are a lagging indicator, Canada may enter and exit a recession before we realize we are in one. When 2 consecutive quarters of minor contractions in the economy occur, say 0.1% negative growth, this is considered a technical recession. 

Canada’s GDP for Q3 2024 showed that real GDP increased 0.3% after increasing 0.5% in Q1 and Q2. This means Canada does not fit the definition of a technical recession or a recession.

Recession vs. Depression: What’s the Difference?

Both recessions and depressions affect the economy similarly. When a recession becomes prolonged and more severe, it becomes known as a depression. Depressions are generally defined as long periods of mass unemployment, falling prices and incomes, and a persistent lack of consumer confidence. Depressions are thankfully rare occurrences, with the last depression in Canada, The Great Depression, lasting from 1929, when the stock markets crashed, until 1939, when WWII began.

Recession	Depression
Period of economic decline	Period of severe prolonged economic decline
Typically lasts for 6 months to 1 year	Typically lasts for many years
Rise in unemployment	Mass unemployment
Decreased consumer spending	Widespread business closures
Stagnant incomes	Lower incomes
Typically impacts a specific country or region but can be felt globally	Typically has a global impact
Usually ends with a period of recovery and economic growth	Usually takes years to recover and can have long-lasting effects on the economy

What Can You Expect in Canada During a Recession?

Some things to expect during a recession are a drop in consumer spending, which will prompt job cuts. If a recession does happen in Canada, you can expect that companies will start reducing workers’ hours, pause or stop new hiring, and lay off staff in response to slowing consumer demand. Those affected by high interest rates or job losses will stop spending and use their savings (if they have any) to pay for essentials. 

According to the latest Business Outlook Survey from the Bank of Canada, businesses continue to experience weak demand, excess capacity, and slowing price growth. Additionally, weak past sales growth due to inflation and interest rate changes has weighed on the economy and consumer budgets. 

Since demand has allowed supply pressures to ease, most businesses can meet their current and anticipated demand and have projected modest investment and hiring plans. Hiring remains slightly weaker than average, with businesses reporting that they intend to keep employment levels stable and those planning layoffs are near the historical average.

How to Plan for a Canadian Recession in 2025

If a recession were to happen, here are some things you can do to plan ahead and protect your finances.

Reduce Your Spending

Hold back on large purchases such as an expensive car, an upcoming holiday, or any non-essential items that can wait. Reconsider your smaller purchases, such as subscriptions and memberships you don’t use. Take this opportunity to review your budget or start if you don’t have one. Pay particular attention to daily spending habits like coffee or takeout, which can quickly add up each month.

Reduce Your Debt

To start reducing your debt, you’ll want to look at all your bank statements, credit and store card statements, and student loans to get a precise picture of your current debt. Then, make a plan to repay them as soon as possible. The longer a recession lasts, the longer it’ll take higher interest rates to readjust to their mean. You’ll want to start working toward paying off the debts with the highest interest rates first.

Improve Your Credit Score

You should strive for this at any time of the year. To improve your credit score, repay the minimum payment plus a few extra dollars on each credit card statement and keep your card utilization low, ideally below 30%. To avoid missing a due date, automate half the minimum payment plus a few extra dollars to occur biweekly or semi-monthly, ensuring that more than the minimum payment is made to your credit card each month and at least 4 business days before your monthly due date.

Increase Your Emergency Funds

Start creating an emergency fund as soon as possible, as high unemployment is one of the direct effects of a recession. Financial planning is vital to help you weather any economic uncertainty. You will want to save enough money to cover your basic needs, housing and food in case you lose your job or your company reduces your working hours. 

Generally, you want at least 3-6 months of expenses saved in an emergency fund to fall back on in the event of a job loss or other emergency. Try to set up an automated savings plan through online transfers to your savings account on your payday so that you don’t miss out on putting aside this amount each pay period.

Strengthen Your Resume and Broaden Your Skills

Recessions typically affect low-skilled retail service workers more, as discretionary spending is usually the first thing a household will cut amid economic uncertainty. Learning a new skill can help strengthen your resume and make you more desirable to potential employers if you lose your current job. 

For professionally trained workers, upskilling for your current job can help you become more valuable to the company and make you more desirable to potential employers should your company need to downsize. Start connecting on professional platforms such as LinkedIn and add any new skills to your resume. 

Stay Invested and Diversify

If you don’t immediately need the funds, keep your investments even if the market seems volatile. It is important to understand that if you have an existing investment, market volatility is normal and beyond your control. 

Market downturns are meaningless if you continue to hold your investments, as eventually, markets will go back up, and you can realize the gains by cashing out in the future. Diversified portfolios perform better over the long term and in uncertain times. 

If your cash flow allows you to maintain current automated investment contributions, it will help you buy the same investments at a discount while the market is down. However, your priority should be to save 3 to 6 months in cash savings first to offset any temporary income loss.

Frequently Asked Questions

In this section, we’ll answer some frequently asked questions relating to recessions.

Final Thoughts

When signs of a recession pop up in the economy, it’s essential to take that as an opportunity to plan ahead and ensure you’re prepared for a possible slowdown. The silver lining during this challenging economic situation is that recessions typically end with a period of growth and economic recovery. Taking a proactive approach now can help mitigate the impact of a recession on your finances and ensure you’re prepared in the event of an economic downturn.

If you’re approaching a mortgage renewal, now may be the best time to lower your carrying costs by locking in a low rate with nesto. Reach out and speak to our mortgage experts to see how much you can save.

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