What is a recession and what does it mean for you?

Many economics across the world are starting to see signs of slower growth, and a recession in Canada may come this year. During times of economic uncertainty, it’s normal to worry.

Whether you’re worried or not, it’s important to understand what a recession is, and what you can expect.

What is a recession?

Economists use various criteria to figure out whether an economy is in recession. The most common is if economic activity, as measured by gross domestic product (GDP),* declines/falls for:

• six months, or
• two consecutive three-month periods.

During a recession, there’s a rise in unemployment. Fewer jobs mean that people are earning less and spending less money. It also means that businesses are growing at a slower pace or may even be in decline.

What causes a recession?

There are many factors that can contribute to a decline in GDP, including the following:

• higher interest rates, which make it more expensive for businesses to borrow money to fund growth;
• lower consumer confidence, caused by negative events (such as the COVID-19 pandemic), which leads consumers to delay spending;
• crises in the financial system, which can bring about a sharp drop or crash in  stock markets
• international trade wars and tariffs;
• extensive government spending cuts; and
• sudden disruptions in the supply or demand of essential commodities, such as oil, which can lead to a drastic increase in their price.

What’s the difference between a recession and a depression?

A depression is more severe than a recession and lasts much longer. It results in lower consumer spending and, compared to a recession, often includes:

• a higher level of unemployment,
• a much lower rate of industrial production and
• a higher rate of business failures (bankruptcies).

Canada has experienced a total of five recessions since 1970 and twelve since 1929.¹ Recessions in Canada usually last between three to nine months.¹ As an example, the 2008–09 recession, lasted seven months.¹

How does a recession affect you?

A recession can affect people of all income groups. You may have already experienced a job loss. Or, your salary may not be going as far due to high inflation. With financial markets volatility, you may have also experienced a temporary decline in your investment portfolio.

As a result, you may have difficulty paying your bills or saving money. This may cause you to go into debt to make necessary payments.

It’s important to remember that recessions are typically short-term and that the economy eventually recovers.

How can you keep your finances on track during a recession?

While you can’t avoid the impact of a recession, you can help protect your finances during one. Here are some tips to help you weather a recession:

1. Use an emergency fund rather than credit

You can’t always predict a financial emergency. But you can prepare for one by having an emergency fund to help you through difficult times.

Do you currently have an emergency fund that can cover some of your living expenses? You can use it to help you through a temporary loss of income. It’s a much better alternative to high-interest credit cards, which will only sink you deeper into debt. When you borrow from your own emergency fund, you have only yourself to pay back.  

If you don’t already have an emergency fund, it’s never too late to start building one. You can build your emergency fund in small steps. First, take a realistic look at your current expenses. Then you can figure out how much you can afford to set aside now. Maybe you can only put away $5 or $10 a week right now. Not to worry: that’s a good start. Simply choose a set amount per week or month that you’re comfortable setting aside. Then have that amount automatically transferred from your chequing account into a savings plan. Remember to review the transfer arrangement regularly and increase the amount whenever you can.

2. Create a budget or review your current budget

Creating a budget is a great way to:

• figure out where your money’s going right now and
• make sure it’s going to the right places.

If you already have a budget, now’s a good time to review it.

Start by making a list of your monthly expenses. Then, ask yourself if there’s anything you don’t need. For example, when reviewing your budget, you may find that you have some unwanted subscriptions you can cancel. You can then redirect some or all of that money to your emergency fund.

Next, ask yourself if there are any living expenses you don’t have to pay right away. Banks, creditors and mortgage providers may offer options to help clients who’ve been financially impacted by a job loss. Give them a call to see if they offer any support programs or flexible payment options that can help you through hard times.

3.  Stay invested – even when the stock market goes down

When financial markets decline drastically, you may feel anxious or panicked. You may also feel tempted to sell your investments or make significant changes to your portfolio. But it’s usually best not to act on such emotional impulses.

If you already have a diversified portfolio,* it’s probably best to stay invested. There’s a good reason for staying the course. Historically, financial markets tend to recover from large declines and then go on to produce further gains. This is what happened after COVID-19 pandemic.

Want to learn more about diversification? Please read this article:

Diversification can help smooth out returns over the long term

In addition, staying invested allows you to capture any gains as markets recover. If you sell when markets decline, you’re:

• locking in a loss from selling at a lower value and
• missing out on any gains as markets rebound or recover.

This article presents more benefits for staying invested in the markets:

Does it pay to stay invested when markets fall?

4. Get professional help from an advisor

Are you worried about the possible impact of a recession on your savings? Talking to a professional may help to ease your concerns.

Now is a good time to talk to your advisor if you have one, or to find an advisor if you don't. An advisor can help you:

• make well-informed financial decisions,
• find ways to reduce your debt and save more money,
• create an effective investment plan and build a well-diversified investment portfolio that meets your short- and long-term goals,
• revise your plan as your financial situation and needs change,
• provide you with confidence in times of uncertainty, and
• help you to avoid making poor, emotionally-driven decisions that could hurt your long-term financial goals.