Although it may seem so, we are not yet in a recession. Although a recession is defined as two successive quarters of negative GDP growth, it is essentially a period in which economic growth falls significantly and unemployment rates rise.
Given the lack of a precise definition, there is not always full agreement on whether an economy is in recession, but the current cost-of-living crisis has many wondering when the next one will begin.
runaway inflation
The general consensus among economists is that a recession is likely to occur sometime in 2023. This expectation is largely due to the interest rate hikes that central banks around the world have undertaken to combat the inflation.
Inflation – the growth rate of the prices we pay for goods and services – has risen to levels not seen in four decades. High rates of inflation have a negative impact on purchasing power and make it difficult to buy basic necessities such as food. Inflation also has a negative impact on economic efficiency, resulting in lower overall growth.
When interest rates rise, it becomes more expensive to finance the purchase of larger items, such as cars, houses, and vacations. Any purchase that requires financing becomes more expensive when interest rates rise.
When existing debts have variable interest rates, the cost of maintaining them also increases. As a result of these increases, the demand for many goods and services decreases and, in the long run, so does inflation.
What happens in a recession?
During a recession, companies are forced to reduce hiring, lay off workers, and reduce work hours.
Many of these job losses are concentrated in the services sector, especially on digital platforms, where incomes tend to be lower and employment is precarious.
A loss of income means that people have to dip into their savings – assuming they have any – to pay for essentials like food, lodging and transportation. The possibility of losing your job, or having your work hours reduced, is therefore the biggest impact of a recession on families. So most people should prepare.
How to prepare
With the threat of a recession, many families are legitimately concerned about the state of their finances. In anticipation, here are six tips you can follow to prepare for a recession:
Cut expenses immediately, especially on non-essential items. Take the opportunity to review your budget and reconsider the daily spending habits that build up. For example, reconsider meals eaten away from home or transfers that automatically come out of your account each month. It is a good time to rationalize and justify spending habits.
Pay off your credit card debt now. It’s important to pay off credit card debt as much as possible and as soon as possible. In the coming months, interest rates will continue to rise, which will make it more difficult to manage debts. Lower debt balances allow for a lower level of interest payments, making it easier to navigate financially difficult periods.
Pay special attention to paying bills and avoid late fees. These charges also accumulate over time. Make a plan to ensure that bill payments are made on or before the due date. Paying bills late leads to monetary penalties that should always be avoided, but especially during a recession.
Prepare to lose your job. Make sure your resumes and cover letters are up to date and that you’re prepared to look for a job. In case you lose your job, be prepared to find another job soon.
Make yourself more employable. Since recessions tend to hit the least experienced and least educated hardest, keep your job-related knowledge up-to-date. Explore virtual options that allow you to upgrade, or in-person offerings through colleges and universities, to further your education and skill development.
If you can, try to get a job recession proof. The most recession-resistant jobs depend on skill levels, but tend to be in the public sector, health and education. Of course, these jobs are not for everyone. Each person should consider options that fit their abilities and preferences. This strategy is much more successful when your skills and resumes are up to date and you are well prepared.
Plan for the worst but hope for the best
Some of these strategies are easier to apply than others. But perhaps the greatest lesson of all is to always be prepared for the worst. Recessions, or economic downturns, are part of what is called the business cycle, which describes the ups and downs of the economy. Recessions typically occur once a decade and sometimes more frequently.
People should try to be prepared for these recessions. It is much easier to carry out the above strategies in advance, instead of waiting until the last moment. The closer to a recession one tries to follow these strategies, the more difficult it will be to be well prepared.
Even if you plan ahead, living through a recession can be scary. But the good news is that they don’t last forever. All we can do is plan for the worst and hope for the best.
Walid Hejazi, Professor of International Business, Rotman School of Management, University of Toronto and George Georgopoulos, Associate Professor, York University, Canada
This article was originally published on The Conversation. Read the original.
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