What Does a Recession Mean? Recession Definition & How to Prepare for One
Wednesday, 27 July 2022
It’s all over the news. Markets are falling. And fast.
Maybe you are seeing your investments plummet or your business slowing in profits. You’re hearing terms like “bear market” and “recession” pop up everywhere. The fact is not all economists agree about whether a recession is coming, but recessions are a normal part of the economic cycle. So, while they can be challenging, just remember the economy always bounces back.
This blog will answer the question, “what does a recession mean” by explaining the recession definition. We will also provide tips on how to prepare for one. Get a better understanding of what happens during a recession, so you know how to respond to the potential economic downturn.
What Does a Recession Mean: Recession Definition
What does a recession mean? A recession is defined as a period of economic downturn where there are two consecutive quarters (six months) of negative economic growth. A recession may be caused by the bursting of an economic bubble (e.g., the stock market crash in 1929), a political crisis, a major technological shift, a financial crisis (e.g., the financial crisis of 2008), or other triggers. Recessions can last anywhere from a few months to several years.
As a result of the pandemic, supply chain disruption, and overseas conflicts, the Canadian government’s spending led to unusually high inflation. To combat this, the Bank of Canada declared a series of interest rate hikes hoping to slow inflation and bring a market correction. Economists have polarizing views on whether these interest rate hikes will simply return the market to normal or lead to a recession.
What Happens During a Recession?
We certainly don’t want to be all “doom and gloom,” but understanding what happens during a recession can help you make wise financial decisions. A recession typically looks like this:
- slowing economic growth (GDP) and declining stock prices
- slowed hiring, layoffs, and more unemployment
- decreased spending and consumer confidence
- loan defaults and bankruptcies for excessive debt
- falling asset prices (e.g., housing)
- low interest rates
Though a recession’s trigger may vary, when the economy declines, businesses cut back on production, lay off employees, or close down to maintain profits at their current levels. Consumers (especially those with reduced hours or job loss) try to spend less on everyday goods and services, which causes lower business profits and government tax revenue. With decreased tax revenue, governments often pare down ‘less important’ spending initiatives such as infrastructure projects for transportation networks, public utilities, and education/community facilities.
What Does a Recession Mean for Your Investments?
With a potential recession on the horizon, you might be wondering, “what does a recession mean for your investments?” The first thing to remember is this:
DO NOT PANIC.
Why? Markets are cyclical – the economy will recover from a recession. It just takes time. How you handle it widely depends on the timeline of your financial goals.
Long-term financial goals
If your goals are long-term (more than one year), here are some tips to handle a recession:
- Stay invested in the market – avoid panic selling
- Wait it out. The markets will recover, and you will be able to turn a profit
- Diversify your portfolio to soften the blow
- Revisit your risk tolerance and asset allocation, but don’t make drastic changes
- Talk to the BIG financial team to get helpful advice for your situation
Short-term financial goals
If your goals are short-term (less than one year) or you are nearing retirement, it’s crucial to speak with a financial advisor about the best way forward. For more about investments, check out our blog Is Now a Good Time to Invest?
How to Prepare for a Recession: Get Your Finances in Order
What does a recession mean for your finances? One of the most important tips on how to prepare for a recession is to create (or re-evaluate) your financial plan. There are several aspects to a solid financial plan that will keep you afloat.
Build an emergency fund for unexpected expenses
Your emergency fund should include three to six months' worth of expenses in case of a sudden job loss or unforeseen repairs. Keep the funds in a high-interest savings account so you don’t spend them inadvertently. Also, set up regular transactions on payday so you don’t forget to save.
Create a budget (and stick to it!)
During a recession, focus your budget on the necessities (housing, utilities, groceries, debt payments) before splurging on the extras (vacations, dining out, new gadgets). We have a comprehensive guide to creating a budget here: Budgeting 101. You can also look for creative ways to save money – read our blog on How to Save More Money.
Be intentional about saving and investments
Talk to a BIG advisor about your savings goals and investment plans. Our team will tailor advice unique to your situation and provide the best options to meet your goals and needs.
Start a Side Hustle
Starting a side hustle can be a great way to make extra money during a recession. A good place to start is looking at the skills you have or have developed in your career, or as a creative hobby. If you’re good at something, chances are someone else will pay for it.
Keep your credit score healthy in case you need to borrow money
A healthy credit score can ensure you get favourable interest rates if you need to take out a loan. Make payments on time, keep a low debt-usage ratio, and prioritize paying off high-interest debt to stave off a crippling debt cycle. Read more about how you can improve your credit score in Canada.
Avoid borrowing money from high-interest lenders
Whether it’s a payday loan or putting charges on your credit card, it’s easy for debt to spiral out of control during a recession. Do your best to avoid high-interest debt. If you need quick cash, consider our next point before resorting to expensive loans.
It’s Okay to Ask for Help During a Recession
Remember that it's always okay to ask for help. Our strength lies in community, and you will find that there are plenty of resources available if you look. In addition to asking family and friends for support, try contacting local charities or government agencies about free programs in your area.
How a Recession Affects Insurance Rates
During a recession, the insurance industry may start to see something called “rate-hardening.” When there are low investment returns and increased claim payouts, insurers impose stricter rules for new policies and reassess premiums to ensure they are financially secure enough to protect their customers. This may make it more difficult to renew an existing policy. It could also increase your insurance rate when you renew.
But this is a great time to shop for your insurance with BIG. As a brokerage, we have access to several insurance carriers and our brokers can find you the best rates all without compromising coverage.
We hope this blog answered the question, “what does a recession mean?” for both the economy and your finances. The main point to remember is that even if things are looking bad, there’s always a way forward—and that way will involve working together to find solutions. Start saving BIG by getting a free car insurance quote, or speak with BIG advisor to start your financial plan. Contact us now!
Author: Amy Legault