The average Canadian household could see a reduction of $3,000 in their overall purchasing power in 2023, according to a recent RBC report. This will likely be caused by higher prices and interest rates across the board.
The same report also predicts that Canada is heading for an economic recession as early as the first quarter of 2023.
Today I’m going to show you how an economic recession could affect your finances and give you some tips to make sure you’re prepared for what’s to come.
Ways an economic recession could hurt your finances:
A recession can have several negative effects on your household finances. Here are some of the main pressure points that Canadians might feel:
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Higher interest rates
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Higher cost of goods and services
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It can be more difficult to find a job (especially for young graduates)
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There may be pay cuts or you may not receive bonuses at work
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Stock market investment losses may decline
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Small businesses may struggle to keep or attract customers
Below, I’ll cover each of these in a bit more detail so you have a better idea of what to expect.
1. Job loss or reduced hours
When an economic recession occurs, the entire economy suffers. Many businesses may struggle to retain customers or attract new business. In turn, business owners may have to lay off some of their employees or reduce their working hours in an effort to save money. It could even affect top performers.
If you have a union job or a government job, your position may be a little more secure. However, nothing is promised, so be sure to do what you can to prove your worth to your employer.
2. No bonuses or pay raises
If you are used to receiving quarterly or annual bonuses, you may be disappointed this year. Just as many companies will have to reduce their employees’ working hours, they will also have to reduce their additional expenses on bonuses and other rewards.
Employees who should receive a raise could also be affected and may see their raises deferred for the time being. You can ask your employer if this is what to expect and budget your finances based on what they tell you.
3. Harder to find high-paying jobs after university or college
I have bad news for recent graduates – it might be difficult to find a job in your desired career path. Some of the companies you may want to work with will already be laying off employees, which means hiring new employees is probably the last thing on the company’s mind.
In this case, recent graduates may find it easier to join the gig economy, return to live with their parents to save money, or learn new skills and wait for the economy to improve.
4. Declining demand for service businesses
If you run a service business like landscaping, snow removal, house washing, or doing custom audio installations, you may see a dramatic drop in your customer base.
As Canadians’ finances get tight, many will drop some of the “luxury” services they subscribed to. They will start to take care of their own maintenance or postpone some purchases after the recession.
5. Higher interest rates on credit cards and loans
If you have a variable interest rate credit card, you may see interest rates rise through 2023. The Bank of Canada recently raised its key interest rate by 75 basis points to 3.25%, and many Canadians have already seen an increase in credit card interest rates.
6. It will be more difficult to obtain a loan or financing
If you’re applying for a loan for a small business, trying to mortgage a home, or need to finance a new car, you’ll likely face more scrutiny. In addition to higher interest rates for all loans, applicants may be subject to more rigorous screening or be required to make a higher down payment on the amount they finance.
7. Investments could be more volatile
If you invest in the stock market, you may find yourself in a bumpy ride. Stock prices typically fall during a recession. Investors often lose confidence in their investments as companies show reduced profits and many people withdraw their money from the market for fear of heavy losses.
8. More difficult to start a business
If you are planning to start a new business, you might run into some difficulties. For one thing, lenders are less likely to approve small business loans. Second, Canadians will spend less, making it difficult to get new customers. Finally, your business expenses and the cost of goods may increase as you lose some of your purchasing power.
During this volatile time, it’s important to save money where you can, spend wisely, and continue to bring value to your work.
Christopher Liew is a CFA charterholder and former financial advisor. He writes personal finance advice for thousands of Canadian readers daily on his Wealth Awesome website.
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