How to Plan for A Recession in 2024

How to Plan for A Recession in 2024

Table of contents

    With constant whispers about a possible recession already occurring or bound to occur in 2024, the best thing you can do is plan rather than panic. It’s important to start planning ahead for the possibility of an economic downturn. 

    In this blog post, we’ll walk you through 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.

    Key Takeaways

    • Recessions are temporary periods of economic decline, typically shown through 6 consecutive months of GDP decline.
    • Recessions can be caused by unexpected economic events, inflation, high interest rates, and bubbles.
    • 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) declines. 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 has often been a warning sign before recessions occurred in the past. A yield curve inverts when short-term bonds have higher yields than long-term bonds. 

    For example, a 2-year bond currently has higher yields than a 10-year bond in Canada, indicating the yield curve is inverted and 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 come in lower than expected. This leads to declining investor confidence and the stock market 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 cause shock to the economy and cause a recession. This was seen in March 2020 when 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 make debts like mortgages and loans more expensive, meaning those faced with higher rates will cut spending as much as possible in other areas or may even default on their loans. High interest rates are a tool the Bank of Canada uses 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 Q2 was revised during the Q3 release of data on November 30th, showing that Real GDP edged up 0.3% quarterly rather than declined 0.2% as previously reported. This resets the clock in Canada to fit the definition of a technical recession. Q3 data shows Real GDP fell 0.3% quarterly, meaning we won’t know until Q4 data is released on February 29th, 2024.

    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

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    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. 

    Based on the latest Business Outlook Survey from the Bank of Canada, firms report that economic growth has slowed. Most businesses responded that higher rates would put pressure on sales and investment plans over the next year. In addition, they are responding to weakened demand by slowing hiring, with a small share of firms planning to reduce their workforce. Those looking to reduce their workforce tend to be those negatively affected by rising interest rates. 

    How to Plan for a Canadian Recession in 2024

    With a recession likely 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 that 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 higher the interest rate you will pay, so you’ll want to start working toward paying off the debts with the highest interest rates first.

    Improve Your Credit Score

    This is something you should strive for at any time of the year. Make sure to repay the minimum payment plus a few extra dollars on each of your credit card statements and keep your card utilization low, ideally below 30%, to improve your credit score. 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.

    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 earmarked savings as a rainy day fund.

    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.

    Is a recession coming in 2024?

    GDP data suggests that we may already be in a technical recession. However, private sector economists in the Fall Economic Statement (FES) expect Canada will avoid a recession.

    Should I invest during a recession?

    A recession could provide an opportunity to invest as stock prices fall when the economy slows. An automated investment plan in a well diversified investment portfolio that is in sync with your risk appetite should be maintained if you have the means to do so. It’s always important to seek professional advice to ensure you’re making the wisest investment decisions.

    How should I prepare today for a recession?

    To get ahead of an economic downturn, you can start by preparing a budget and tracking your expenses and spending habits for a few months. From there, you can look at your discretionary spending and find ways to save to better prepare your emergency fund or pay down any high-interest debts.  

    Final Thoughts

    When signs of a recession start to 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 recession in 2024. 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 knowledgeable and licensed mortgage experts to see how much you can save.

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