4 Consequences of a Recession for You and 4 Ways to Prepare Yourself to Better Face It.
Being prepared will give you a better chance of getting through this difficult time.
At the end of May 2022, David Malpass, the president of the World Bank, spoke to the U.S. Chamber of Commerce and explained that he saw 5 major reasons why the world could not escape a recession in the coming months.
He obviously couldn't give dates, but David Malpass was more than pessimistic. His speech was meant to prepare for the release a few days later of worse-than-expected figures by the World Bank.
In the report published on June 7, 2022, by the World Bank, here is the sentence that worried the most:
“Global growth is expected to fall from 5.7% in 2021 to 2.9% in 2022, significantly lower than the 4.1% forecast in January.”
It is thus obvious that the situation is getting worse at the global level. Even worse was the fact that the World Bank views the current situation in the same way as the stagflation of the 1970s. And this is for three reasons:
Persistent supply-side disruptions fuel inflation, preceded by a long period of highly accommodative monetary policy in the major industrialized countries.
Weakening growth prospects.
Emerging and developing countries struggling with the tightening of monetary policy to contain inflation.
The recovery from stagflation required large increases in interest rates in industrialized countries, “which played a major role in triggering a series of financial crises in emerging and developing countries,” the World Bank warns.
The Fed's increasingly steep rate hikes at each FOMC meeting are no accident. The Fed can see that it is out of its depth, and it must act as quickly as possible if it has not done so in advance. Moreover, the high inflation in America is largely due to a rise in energy prices over which the Fed has no control.
Jerome Powell and other central banks starting to worry. It's about time, if I may say so. If this inflation can be an opportunity, it is a challenge for hundreds of millions of people around the world who are struggling to make ends meet.
The Atlanta Fed's indicators are clear: we are headed for a recession in America. This lends further credence to what David Malpass envisions. I'll stop there, but you get the idea that everyone on all sides thinks things are going to get worse.
What is a recession?
Now that it is becoming increasingly clear that a recession is in the offing for America, I think it is important to define what a recession is. It's a word you may read more and more often in the headlines, but perhaps it doesn't mean anything concrete to you.
The U.S. Bureau of Economic Analysis defines a recession as “a marked slippage in economic activity”. You can think of it as a downturn or contraction, or the opposite of an expansion.
Whatever you call it, you need to keep in mind that it will have an impact that is not neutral on your finances. Economic growth creates opportunities: new businesses, more jobs, and higher wages. In contrast, recessions will eliminate many opportunities: failed businesses, fewer jobs, and lower wages.
The last real recession in America was between December 2007 and June 2009. That's something that doesn't happen all that frequently, but it's still not unusual. Since 1945, there have been 11 recessions, which lasted 11.1 months, on average. The shortest was six months, the longest 18 months.
Since downturns happen cyclically, each presents an opportunity to learn and prepare for the next. Smart planning can help you and your family get ready for the next recession, whether it occurs in 2022 or further into the future.
Why does a recession occur?
You've figured out what an economic recession is. You should probably ask yourself why it happens. The reason recessions happen occasionally is because the economy is cyclical. In America, economic activity will expand until a peak in performance is reached. The expansion then falters until it bottoms out in a recession. Then activity begins to expand again. What goes up must come down.
The most complex thing about recessions is that they are hard to predict. A May 2019 Federal Reserve research note observed that “recessions are notoriously difficult to predict”. Economists use charts (and more charts and more charts) to identify patterns in economic cycles that may explain why recessions occur, why some are more severe than others, and when the next one might happen.
The recession that is looming in America for late 2022 or early 2023 has multiple causes. The COVID-19 pandemic has pushed central banks to adopt ultra-accommodating monetary policies that have overheated the system. This led to high inflation that would not come down and was fueled by the war in Ukraine and its consequences.
The Fed has finally decided to tackle the problem of inflation head-on by raising interest rates sharply. The goal here is to slow down the economy to calm demand. By raising rates sharply, it will affect individuals and businesses who will borrow less and it will slow down demand until supply can also return to normal as the war in Ukraine and China's Zero-COVID policy have damaged global supply chains.
The problem is that by doing so, the Fed will induce at least a technical recession in the economy. This is an accepted risk because, for the Fed, everything must now be done to put the brakes on and curb this inflation.
Once inflation is curbed, then the Fed can think again about lowering policy rates to deal with the recession. It may seem counterintuitive, but the Fed needs to raise rates sharply first so that it can lower them again and return to a situation of normal economic growth.
The 4 main consequences of a recession
In a recession, you are going to have several consequences for individuals and businesses. Of course, it all depends on how long the recession lasts, but I see 4 main consequences that you should have in mind.
1. Job losses
When economic activity shrinks, businesses will cut jobs. This has already begun in many sectors in America. These companies will spend less in many other areas: marketing, training, product research, and other operations.
The Fed, which has to make sure the job market in America works, knows all this as I told you. However, it will only be secondary to its current priorities.
2. Health consequences
This is a consequence that many may not see at first glance, but during the recession between 2007 and 2009, the health consequences for workers were very significant according to the Social Security Administration.
Job losses affected not only workers' employment and earnings, but also their health insurance coverage, retirement savings contributions, financial security, and health behaviors and outcomes.
Workers who lost their jobs were more likely to receive “safety net” government assistance, such as disability insurance and supplemental security income benefits, even after the recession ended.
3. Student loans
Recessions can have long-lasting effects on younger adults, who may experience unusual difficulty finding or keeping a job during a downturn, says the U.S. Bureau of Labor Statistics (BLS). Moreover, “any delay in employment can reduce asset accumulation over their lifetimes,” the BLS said in a June 2019 report. So the situation can quickly become dramatic for younger people with student loans to repay.
That's one reason why many advise paying off student debt as quickly as possible to have more financial flexibility in the event of a recession. You could be out of work or forced to take a lower-paying job to survive.
4. Opportunities
Recessions are a challenge, but also an opportunity. It will depend on your industry. During the Great Recession from 2007 to 2009, many successful companies were founded: WhatsApp, Uber, Venmo, Instagram, Slack, Square, Groupon, ...
I'll stop there, but history is full of highly successful companies that were founded during recessions. It all depends on your industry, but keep in mind that any challenge in life can also represent an opportunity.
4 ways to best prepare yourself for a recession
Even though a recession seems to be looming by the end of 2022 in America, know that it's never too late to prepare. Your goal should be to be able to weather this difficult time as best you can, keeping in mind that it will only be temporary. Because all recessions come to an end, as I explained to you recently.
Here are 4 ways to prepare yourself as well as possible.
1. Build a solid emergency fund
This is a golden rule of personal finance management. You must be able to last at least 6 months without a job. In a recession, you should even build up your emergency fund to be able to last up to a year without work.
You never know what can happen in the job market during a recession as we are seeing with the current wave of layoffs in the tech world.
The more you save, the less chance there will be that you'll have to max out your credit cards, raid your retirement accounts, sell your valuables, borrow from your friends, or move in with your parents or adult children if you're out of work.
2. Get rid of your debt
Having debt is never a good thing in life. In a recession, it's even worse. So you should get rid of your debt as soon as possible so that you can have more financial flexibility during a recession.
Generally speaking, except in specific cases where debt is used as leverage, but that's reserved for those who know what they're doing, I always recommend not buying things you can't afford. Be patient, and learn to save.
3. Prioritize your purchases
Recessions favor those who have developed good habits in managing their finances. If you haven't already done so, you'll be forced to ask yourself the right questions when it comes to your purchases. Do you need everything that the consumer society is trying to sell you?
Do you need the new iPhone that Apple will have taken care to increase with its pricing power? Do you need a new car or to go to a restaurant almost every night?
In short, you will have to manage your budget more finely by defining priorities. Learning to get by with less is the key to recession-proof living. I would even advise you to continue with these good habits afterward by focusing on frugality.
4. Prepare your career to be recession-resistant
If you have any doubts about the strength of your job even before a recession hits, you should already be preparing to update your resume, learn new skills that are in demand, and network to create contacts that will help you bounce back if the need arises.
It's best to prepare for the worst so you can bounce back quickly. If you lose your job due to the recession, your emergency fund will get you through the weeks you need, while your network may get you back on your feet faster than others.
Whatever happens, you'll probably have to make some concessions. This is a necessary evil to get by, keeping in mind that the economy will eventually turn around. The important thing is to have enough to weather the storm.
Some reading
Mid-Year Review 2022 – 10 Lessons for the Financial Markets. The hardest part is probably still to come.
For Contrarian Investors, Here Are the 3 Reasons to Smile With the Bitcoin Price at $19K. "Buy when there's blood in the streets, even if the blood is your own."
Always a Contrarian, Michael Burry Predicts a Bullwhip Effect in the Months to Come. Some of the economic data in America point in his direction.
Here Is Why the G7 Ban on Russian Gold Is a Game-Changer, Even for Bitcoiners. This ban brings us closer to the scenario long anticipated by gold bugs.
The Enlargement of NATO To Include Sweden and Finland Is Another Setback for Vladimir Putin. Putin wanted the sort of the Finlandization of NATO. He got the NATO-ization of Finland, instead.