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The news and economists are priming our country to expect a recession. The article, “‘All but set in stone’: More economists join chorus predicting a Canadian recession” Financial Post, September 19, 2022, outlines predictors for a recession. What does it mean for Canada to go into recession? How will it impact our lives?
What is a recession?
A recession occurs when a country’s economy shrinks in size for two consecutive quarters (6 months) and is usually measured by a smaller GDP (Gross Domestic Product). On average, a recession occurs once per decade.
Why do recessions happen?
Most often recessions happen when there is high inflation, people are spending too much money, and governments want to cool the economy. Governments generally cool the economy by making people’s debt more expensive which decreases the demand for goods and consequently reduces inflation. Because Canada has a high level of personal debt, when interest rates increase, people need to put more of their earnings towards paying the interest on their debts.
Recessions are stressful, so why would governments want to go into recession? Governments trigger a recession because high inflation is even worse and one of the only ways to kill inflation is to go into recession.
Two bad things about inflation:
Sometimes recessions happen because of an unexpected world event. A great example of this was the financial crisis of 2008. Inflation wasn’t high but because of greed in the financial markets, much of the world went into a recession.
How do we know we are in a recession?
Most of us don’t watch our country’s GDP but there are other signs that tell us we are in or about to enter a recession.
Signs to watch for:
The current expected recession may occur as a result of high inflation so we will spend the rest of our time discussing this source.
What financial actions should you take to prepare for a recession?
Be prepared to capitalize on opportunities
Yep, you read it right…opportunities. Whenever bad things are happening around us opportunities arise. A recession is no different, the challenge is knowing when the opportunity is right to capitalize on recessions. Remember the signs of a recession: stock markets go down, bonds go down, and real estate drops in value. Watch for indicators which often tell us before other things where the economy is heading:
When an economy goes into recession the following generally happens with real estate
How do you know when to capitalize?
You don’t always know, and you won’t always get it at the very best moment…and that’s ok.
Often when things seem the worst is when it is the most opportune time to capitalize on the opportunity. I remember back on March 9, 2009, a Forbes article summarized the situation well. The question was asked, ”How low can stocks go?”
It wasn’t an idle question. The Dow was on its fourth straight week of losses, while the broader S&P 500 was below 700 for the first time in 13 years. Goldman Sachs put out a research report that warned the S&P could fall as low as 400.
A year later, we know that March 9 was the bottom of a months-long financial panic that wiped away trillions of dollars in assets. But on what now appears to have been the best buying opportunity of a generation, many only wondered how much lower the markets would tumble.[i]
I remember that day (March 9, 2009). I had been in the industry 5 years, and it was my first recession as an advisor. And while in the end I chose to go with logic that “this too shall pass”, I remember my emotions churning, my stomach in knots and thinking, “What if it is different this time?”. But it wasn’t different, and it did pass.
Depending on your stage of life (retired, young, middle age), your strategy to capitalize on a recession will be different. If you are retired, it is more about capital preservation and cash flow, not capitalizing on opportunities.
Here are 3 things that I would recommend if you have low to no debt, have a stable job and good free cash flow that you can use.
Both high inflation and recessionary economies are tough to go through. Stay disciplined, talk with your financial professionals, and implement a plan best suited to your current situation and financial plan.
Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting-edge technology to maximize planning efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at www.connectwealth.com