What To Do If Canada Enters a Recession
Recessions can spark a lot of concern and uncertainty. Suddenly unemployment rates are rising and things start to become more expense. Before a recession hits, most of us Canadians can feel it coming.
Here is what to do and how to react if a recession hits Canada in 2023
What is a recession?
Unlike depressions which last several years, recessions are typically short lived, but can cause long-term economic damage. It occurs after about 6 months of negative gross domestic product (GDP). A negative GDP means that economic activity has been declining rather than growing. This usually results in consumers tightening up their spending habits and trying to save more money. In more severe cases, people may lose their jobs and businesses may close. The COVID-19 pandemic was a good example of a severe recession.
Why do recessions happen?
Recession happen due a complex combination of factors. They are a natural part of the economic cycle and are necessary to regulate the monetary policy.
Some examples of what may trigger a recession:
High inflation rates — to handle inflation the government may raise interest rates which does not help consumer spending. If you’re spending more on your mortgage payments, you have less money to contribute to other areas of the economy.
Negative economic events — the pandemic for instance, or a stock market crash
Debt bubbles — when businesses have excessive debt, and interest rates increase to the point they can’t afford their loans, it hurts the economy.
What happens to Canadians during a recession?
We now know what a recession is and why they happen. But, when it does happen, how will it affect us as consumers?
Put simply, we don’t spend as much money as we use to. With higher inflation rates, consumers are more likely to only spend money on necessities. As mentioned before, the attempt to resolve high inflation rates results in higher interest rates - which means higher mortgage payments. Since Canadians aren’t spending as much money, businesses are forced to layoff employees and reduce production. With businesses feeling the pressure from non-spending Canadians, consequently so does the stock market.
This creates a vicious cycle. Consumers don’t spend, so businesses stop producing, which means more layoffs and a hiring freeze. Consumer confidence falls, and the entire country goes into a recession.
What does the Canadian government do to help?
Instead of increasing interest rates, they will typically lower them. Lower interest rates help spark demand and kickstart monetary circulation in the economy. As a result, businesses can get back to producing more and eventually hiring more employees, and consumers’ confidence will increase in the economy and will begin spending again.
How to prepare for a recession
It’s scary when you think your hard earned money won’t be worth as much as it once was. So here are a few tips to help you stay calm and feel prepared in the event a recession hits Canada:
Consider starting an Emergency Savings Fund
Don’t acquire new debt
Keep your investments!
Revisit your budget and reduce expenses (especially leisurely ones!)
Diversify your resume — adding new skills to your resume gives you an advantage in job searches.
Recessions don’t last forever, so don’t make any drastic changes to account for them. When the recession passes, you’ll be back to your normal spending habits. But, for the time being, there is no harm in being prepared so you won’t have to worry in the event the economy spirals.
