All this talk of a looming recession has many Canadians wondering how to keep their money safe, whether they should be investing, and how it might affect the housing market.
Here are quick answers to these and other common questions about recessions.
1. Will there be a recession in 2023?
In July 2022, Royal Bank of Canada (RBC) economists predicted a short-lived and moderate recession for Canada in 2023 . Relevant metrics like unemployment rates are rising, but they are (and are predicted to remain) lower than they were in previous recessions.
There are many factors at play in the current economic climate, but with inflation on the rise, the Bank of Canada has started raising interest rates. While it’s a typical move to temper inflation, the result of aggressively raising interest rates could be a recession.
2. Where should I put money during a recession?
A good financial plan is designed to weather good markets and bad. Here are some money management tactics consider, before, during and after recessionary times:
Toward your debts
Having fewer debt obligations insulates you against possible interest rate increases. It will also help maintain your cash flow if you lose your job or the cost of living rises disproportionately due to inflation.
In a savings account
Because rising unemployment rates are common during a recession, it’s a good idea to have an emergency fund in case of unexpected job loss. Consider keeping this money in a high-interest savings account so that it grows while stored for safe keeping.
Pro Tip: You can keep HISA funds inside or outside of your tax-free savings account (TFSA), so gains are tax-sheltered, but also easy to access if needed.
In your investment portfolio
While market fluctuations may make you queasy, the Canadian economy has historically bounced back to be even stronger than it was pre-recession. The rebounds tend to be dramatic and unpredictable, and if you move your money to the sidelines now, you might miss out on significant gains later.
If the stock market’s potential for loss worries you, the modest but secure gains of guaranteed investment certificates (GICs) or high-interest savings accounts may be more your speed. Whether you choose a GIC or a HISA depends on your interest rates and funds accessibility preference. GICs may offer higher interest rates but typically lock your funds for specific terms, and HISAs may come with lower rates but allow access to your funds anytime you need.
3. What should I invest in during a recession?
There’s no such thing as a “recession-proof” investment, but if you have funds to spare (and the stomach to surf market fluctuations) there are portfolio options worth considering.
While no one can predict the future, here are some investments that have performed well during past recessions:
Health care and consumer staples
When consumer needs shift during economic downturns, the health care and consumer staples sectors tend to remain stable. However, these sectors also don’t rebound as dramatically as others like consumer discretionary goods and services, such as clothing and restaurants.
Large-cap, healthy company stocks
Larger companies typically have more resources to weather market downturns, making them less likely to go out of business.
Mutual funds, index funds and exchange-traded funds
Investment funds are like mini-portfolios unto themselves; if one company in the fund goes down, others may do better and offset the loss. This inherent diversification could mean your returns will be more stable than those you’d earn by investing in a single company’s stock.
Not only do reinvested dividend payments reduce the overall downturns in the value of a stock, mutual fund or ETF, but reinvesting the dividends lets you buy new shares or units at a lower cost, which can result in greater gains when the market rebounds.
4. Is my money safe in a bank during a recession?
Generally yes, if the bank is a member of the Canada Deposit Insurance Corporation. The CDIC protects certain kinds of deposits held in member institutions. This coverage ensures you get your money back even if your bank goes under.
Up to $100,000 is covered for each of the following types of accounts, per member institution:
- Deposits held in one name.
- Joint account.
- Registered retirement savings plan (RRSP).
- Registered retirement income fund (RRIF).
- Tax-free savings account (TFSA).
- Registered education savings plan (per beneficiary).
- Registered disability savings plan ( per beneficiary.)
- Trust (per beneficiary).
5. What happens to the housing market during a recession?
Home prices typically decrease during a recession, according to analysis of data from the last four recessions by Risk Concern, a financial markets analysis firm based in Alberta . But that doesn’t necessarily mean it’s easier to buy a home during a downturn.
The housing market does not always move in tandem with overall economic conditions, since there are other factors in play like borrowing rates and buyer demand. In fact, a July 2022 forecast by RBC economist Robert Hogue predicts that repeated interest rate hikes from the Bank of Canada will make mortgages unaffordable for many, leading to a drastic drop in home resales through mid-2023 .
There’s also uncertainty about how rising mortgage interest rates will affect current homeowners, especially those whose variable rate mortgages leave them open to sudden monthly payment increases. The mortgage stress test builds in some cushion for borrowers, but it’s still unclear how high rates will go.
Nathan Janzen and Claire Fan, RBC, “Proof Point: Canadas economy is headed for a recession,” accessed July 23, 2022.
Risk Concern, “How Much Do Canadian House Prices Fall, or Crash, In a Recession: 40 Years of Data Analyzed.,” accessed July 23, 2022.
Robert Hogue, RBC, “Downgrading our forecast for Canadas housing market,” accessed July 23, 2022.