What is a recession?
Credit: iA Financial Group
Signs of a potential recession are increasingly circulating in the public space. Here are some insights to help you understand this economic phenomenon.
Are we heading into a recession?
Although it has not been confirmed, many indicators and various experts in the field are predicting a recession over the short or medium term. Whether or not this turns out to be the case, it’s always a good time to start thinking about the possible impact on your finances.
What is a recession and what are the effects on the economy?
In short, a recession happens when a decline in economic activity causes GDP (gross domestic product) to fall for several months. Though all recessions are different, they can lead to reduced consumption capacity and investment, or to some job losses.
What causes a recession?
There are several factors that can cause a recession. The recessions in the early 1980s and 1990s for example, were caused by interest rate hikes, introduced to contain inflation, which led to economic slowdowns.
Other factors can include:
- A major and lasting shock to commodity prices
- A financial bubble bursting
- Corporate debt overextension
- Loss of confidence in the economy
- Wars, pandemics, etc.
In the current global context, if a recession does happen, you won’t be surprised to learn that the pandemic, the war in Ukraine and supply chain problems have fuelled inflation and would be some of the primary causes. Also, household debt related to very low interest rates over the past years is contributing to the current situation.
What effects could a recession have on you?
The effects can vary depending on each individual’s financial situation. Stock market volatility can affect your savings, depending on the risk level of your investments and the diversification of your portfolio.
You may need to review your budget to adjust spending. Though job losses are still possible, in the current context of the labour shortage, the risk of this is lower than in past recessions. As our Chief Strategist and Senior Economist Sébastien Mc Mahon explained in one of his economic reviews: when it comes to jobs, Canada is “very strong, very resilient”.
Also, though interest rates have increased, they remain historically low, which helps to support the economy.
If there is a change in your household’s economic situation, you may be tempted to cancel your insurance policy, or put your automatic savings transfers on hold. As you will see below, however, this is not our recommendation.
Can a recession have any positive effects?
Recessions are difficult while they last, but they are temporary and often described as a “necessary evil” which can lead to new opportunities for you or for companies to reinvent themselves or even close, making way for new business initiatives.
People who are invested in the market for the long term can also benefit when the economy recovers, especially if they are well supported and seize opportunities. Investing fixed amounts regularly is one way to take advantage of these buying opportunities made possible by recessions.
Historical data shows us that following an established plan and staying invested for the long-term is always a wise strategy.
What strategy should you use?
Certain strategies are still relevant, even when the economy is showing less encouraging signs. Here are some examples:
- Stay invested and stay on track for your savings plan
- Keep in mind the risks of selling at a loss when markets are down
- Watch out for potential buying opportunities
- Invest by buying periodically to follow the market and be able to take advantage of upcoming opportunities
- Make sure you have a diversified portfolio
- Build up an emergency fund, if you don’t already have one
In all cases, we strongly recommend that you consult your financial security advisor.
