Wednesday, August 28th, 2019
If you want to guarantee more eyeballs on your news publication, all you have to do is write a headline with the word "recession" in it. Ironically, the fear-mongering of highlighting predictions of a recession could tip a stagnant economy into a recession itself.
As much as we'd like to tune out the financial noise in the media about short-term market movements, it's easier said than done. But perhaps we can turn the latest headlines warning of a potential recession into a learning moment.
The size of an economy is tracked by something called GDP, or Gross Domestic Product. This is the sum of all the goods and services produced over a period of time. Normally, we're used to a slow expansion with incomes rising and spending increasing.
We usually see GDP growth rates quoted in the media. For example, you might see phrases like the following: "The economy grew by 2.2% this year." Or “The Canadian economy grew by 0.1% last quarter."
Generally speaking, a recession is when an economy is contracting (or "receding"). There's a technical definition that sometimes gets referenced for a recession which is when an economy contracts for two consecutive quarters. That means the GDP growth rate for those two consecutive three-month periods would be negative.
That being said, it's not always that cut and dried. For example, the Canadian economy met the technical definition of a recession at the beginning of 2015, but a group of economists who looked at other factors concluded that Canada was not in a recession because the contraction was targeted to part of the overall economy and overall employment actually grew during this time.
It's also possible to see a recession within a province, but not nationally. Alberta had a strong recession starting in 2015 that lasted almost two years.
When people aren't buying as much as they have been, this leads to lower revenues for businesses, which means they may cut expenses. For some people, that means they may be in danger of losing their jobs. Others may not lose their jobs, but they may not be getting the pay increases they expect, or may even suffer pay cuts or increased workloads if they survive company layoffs.
For many Canadians without significant financial assets to fall back on (no emergency funds or other assets they can sell off), they may face difficulty in making good on their obligations like mortgages and other loans. Some may decide to sell their homes, and combined with people who have lost their jobs and hence their ability to purchase homes, demand for housing may decrease, further putting downward pressure on home prices.
In the end, a recession is a scary word because it can lead to a significant change in the lifestyle expectations of those most affected.
Recessions happen from time to time. If you live to 90 you might experience 10 recessions in your adult lifetime (using this US data as a proxy).
So instead of thinking about how you can prepare for a recession right now, you might be better off thinking about how to perennially prepare yourself for a shock to the economy overall, or better yet, a shock to your personal financial world (because you can still have financial emergencies outside of a recession).
That means following the standard personal finance playbook: bulk up that emergency fund, be mindful not to overspend, make sure you have the right insurance in place, and keep your savings rate high. The longer you follow that recipe, the better prepared you will be for any financial hiccups that we know happen from time to time.
This article or video (the “Content”), as applicable, is provided by independent third parties that are not affiliated with Tangerine Bank or any of its affiliates. Tangerine Bank and its affiliates neither endorse or approve nor are liable for any third party Content, or investment or financial loss arising from any use of such Content.... The Content is provided for general information and educational purposes only, is not intended to be relied upon as, or provide, personal financial, tax or investment advice and does not take into account the specific objectives, personal, financial, legal or tax situation, or particular circumstances and needs of any specific person. No information contained in the Content constitutes, or should be construed as, a recommendation, offer or solicitation by Tangerine to buy, hold or sell any security, financial product or instrument discussed therein or to follow any particular investment or financial strategy. In making your financial and investment decisions, you will consult with and rely upon your own advisors and will seek your own professional advice regarding the appropriateness of implementing strategies before taking action. Any information, data, opinions, views, advice, recommendations or other content provided by any third party are solely those of such third party and not of Tangerine Bank or its affiliates, and Tangerine Bank and its affiliates accept no liability in respect thereof and do not guarantee the accuracy or reliability of any information in the third party Content. Any information contained in the Content, including information related to interest rates, market conditions, tax rules, and other investment factors, is subject to change without notice, and neither Tangerine Bank nor its affiliates are responsible for updating this information.
Tangerine Investment Funds are managed by Tangerine Investment Management Inc. and are only available by opening an Investment Fund Account with Tangerine Investment Funds Limited. These firms are wholly owned subsidiaries of Tangerine Bank. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.