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Recession: the word that is on everyone's lips and, above all, the one that is most frequently used by the economic media these days. Although it is a term that can frighten some people, the fact remains that it is possible to weather the storm without losing one's shirt.
First, what is a recession?
There is more than one way to determine if the economy is in recession. The most popular one is the measure of economic activity, which is based on whether the gross domestic product has declined for more than two consecutive quarters. It is important to note that a recession leads to an increase in job losses and therefore an increase in the unemployment rate. These job losses lead to a decrease in income for the affected population and consequently, a decrease in their spending. Economic growth slows down and could even become negative in some cases.
The different causes of recession
There can be only one cause or 2 causes combined, during an economic crisis. These factors contribute to the decline in GDP. These causes can be strictly economic, such as an increase in interest rates on loans from companies wishing to stimulate their growth or a drop in stock prices.
Human factors can also lead to a decrease in economic growth. This is the case of trade wars on a global scale or the drop in consumer confidence that will suspend certain types of spending in particular contexts such as during a pandemic, for example.
A reduction in public spending could also have a significant impact on the economy if a government suspends or reduces benefits to individuals (thereby reducing disposable income and thus purchasing power) or reduces tenders to create jobs, as in the case of the construction of road infrastructure or government buildings.
Finally, a sudden disruption in the supply of certain commodities or non-commodities, such as a production disruption, could cause prices to skyrocket, due to the scarcity of these commodities.
Recession does not necessarily mean depression
A depression is a very serious economic crisis and lasts much longer than a recession. A recession lasts an average of 12 months, while a depression can last several years. For example, the Great Depression of 1929 lasted three and a half years, while the economic meltdown of 2008 lasted 18 months.
An economic depression also leads to a greater drop in consumer spending and its consequences are generally more serious than during a recession. First, unemployment is higher and industrial production slows down more. There are also many more personal and business bankruptcies than in a recession.
What to expect?
An economic crisis affects everyone to varying degrees, rich and poor alike. Some people who have lost their jobs due to COVID may be more severely affected, as they are already economically weakened. Others may face a loss of income due to reduced consumer spending. Indeed, some service sector businesses are more drastically affected by a decline in consumption. This is the case, among others, in the areas of restaurants and various leisure activities (travel, bars, cinemas, etc.) but also in the goods sector, such as cars, high-end clothing, jewelry and other luxury goods and products. Homeowners often cut back on renovation spending during a financial crisis.
For many others, the economic downturn means difficulty paying bills or saving. Some may have to take on more debt to pay for necessities. Finally, the downturn in the stock market could affect your investments and result in financial losses.
Even so, it is important to remember that recessions are usually short-lived and the economy always recovers eventually.
Some tips to get through the storm
An emergency fund
Building up an emergency fund and using it instead of using credit cards is a good option to avoid excessive debt, since credit cards generally have high interest rates and can push you further into debt. It is best to have an emergency fund to pay for current expenses, in case you lose your job or in case an unexpected expense occurs (mechanical breakdown, emergency repairs, medication not covered by insurance). If you don't have an emergency fund, it's time to set one up quickly.
Make a budget or review your current budget
If you already have a budget, you're a forward-thinking person and that's a good thing. Take a close look at your budget to see where your money is going and set aside a budget line item for savings, if you haven't already done so. If you don't have a budget, it is strongly recommended that you take certain steps in this direction, or if you don't know where to start, several consumer assistance organizations can help you in this process.
No matter what category you fall into, a budget will not only help you see where your money is going, but will also allow you to determine which expenses could be cut without doing too much damage. Obviously, these are the things that can be cut back on, such as entertainment, clothing, renovations, travel, transportation, gifts, or some unnecessary indulgences. You might be surprised to find out that the daily coffee, bought from the vending machine at your employer's or at the local restaurant, represents a significant annual sum. In the future, certain so-called incompressible expenses, such as telecommunication or insurance costs, for example, although they cannot be completely eliminated, could potentially be renegotiated downward with your supplier.
Keeping your investments
Faced with the prospect of an economic crisis or stock market crash, some savers may be tempted to cash in their investments. But this tactic is not recommended. For one thing, you may lose money by selling at a low price. On the other hand, you may be pleasantly surprised by a market recovery and an increase in the value of your portfolio when the markets recover.
Requesting the assistance of a financial advisor
If you are uncomfortable with personal finances, don't hesitate to seek help from an advisor. Whether it's a consumer assistance organization or an advisor working for a financial institution or on his or her own account, outside help could save you from a financial meltdown. However, you must take the time to choose this person carefully to avoid being put in a precarious financial situation by someone with bad intentions. Ask a relative, a friend or even a colleague to recommend a trustworthy person with whom they do business. Finally, don't hesitate to check with the Autorité des marchés financiers to see if the recommended person is authorized to do such business. After all. Your financial security and that of your family are at stake.
Martine Dallaire, B.A.A.
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