What Is a Recession — And Is Canada In One?

A recession is a period when an economy experiences negative growth in its gross domestic product (GDP). Typically, a recession isn't declared until GDP shrinks for two consecutive quarters, or six months.

Recessions, while frightening, are part of the global economic cycle. Growth can't continue forever; when it reverses and a recession hits, it's often accompanied by rising unemployment rates and reduced consumer spending.

What causes a recession?

Several situations can drag an economy into recession. These include:

The common thread among all of these scenarios is a major pullback in spending. When consumers and businesses are short on cash or digging out from financial catastrophes, they aren't able to fuel economic growth by making purchases or investments.

Recession vs. depression

Recessions are shorter and less impactful than depressions.

A recession usually lasts less than a year. A depression can last years and is accompanied by acute unemployment, lower prices and incomes, and a lack of consumer confidence in the economy.

The Great Depression lasted 10 years (1929-1939), and is considered the worst depression in history.

What happens during a recession?

Symptoms of a recession include reduced production of goods, which goes hand-in-hand with reduced trade possibilities, employment levels, incomes, stock markets, and consumer spending.

The process is somewhat self-fulfilling. People often reduce spending when the cost of essentials rise, they're carrying too much debt or if they’re worried about the economy. Reduced spending starts the economic slowdown, which in turn causes businesses to stop investing, hiring, or producing as much, which increases the slowdown.

The Great Recession — a great example

The 2008-2009 “Great Recession” in Canada was driven largely by the United States’ housing market crash. When financial institutions in the U.S. collapsed, consumer confidence in the financial sector dried up globally, which affected Canada and other countries.

Foreign investors stopped spending money, which affected Canadian exports. Canadian businesses stagnated, which affected local employment rates and wages, and sent Canada’s economy and consumer confidence downwards.

The government slowly turned things around by lowering interest rates. This made it easier for businesses and consumers to borrow money and spend it, spurring economic growth. With increases in government and consumer spending came increased confidence in the economy and the subsequent recovery.

Canada's recession history

Recessions are a normal, though infrequent part of economic cycles. Since 1970, Canada has experienced six recessions:

While recessions are challenging, they can have silver linings.

Businesses may refocus and improve operations, leading to better-quality products or the identification of new markets to cater to in this process.

Likewise, new businesses may be created. People innovate during tough times, and smaller firms have a chance to carve out a niche when larger businesses are struggling or reshuffling.

Preparing for a recession

1. Curb your spending

Reduced spending is often a by-product of a recession, but doing it preemptively can help you learn to live leaner, and accomplish some of the other goals below like saving money and reducing debts.

2. Beef up your emergency fund

An emergency fund provides easily accessible cash for unexpected circumstances like price hikes or losing your job. Aim to save up several months of living expenses, to be kept in a dedicated high-interest savings account where it will grow over time.

3. Reduce debt

If interest rates rise and you have variable-rate debt like a line of credit or mortgage, you could face much higher monthly payments than you bargained for. The fewer debts you have, the more flexibility you’ll have to get through tough economic times.

4. Strengthen your credit score

Lenders tend to set stricter requirements for mortgages, car loans, and other types of financing during recessions. You can get a better credit score by making payments on time and keeping your credit utilization ratio in check. If you need to build or reestablish your credit score, consider applying for a secured credit card.

5. Diversify income streams

Having different sources of income can hedge against upheavals like job loss (and the extra income in the meantime doesn’t hurt). You can start a side-hustle, get a part-time job, or create passive income streams through investments or entrepreneurial ventures.

6. Review your financial plan

Examine your budget, financial plan and investment allocations regularly to make sure your finances are aligned with your goals. This includes reviewing your investment time frames and giving yourself a gut check of your tolerance for market fluctuations.

7. Stay invested

During periods of economic turbulence, you might feel like the sky is falling and you need to pull all your investments out of the market. Every recession in history has been followed by an economic expansion. Selling at a loss may not be your best bet.

8. Invest more, if you can

When markets are down, investment products like stocks are technically on sale. If you’re otherwise financially secure, it may be your opportunity to buy low, so long as you have the stomach for it.