What is a Recession and Is it Happening in Canada?

A recession occurs when Canadian economic activity shrinks instead of growing. Recessions are often accompanied by increased unemployment and reduced consumer spending.

The world economy is in a bind, and a recession seems inevitable for Canada and many countries. While certain circumstances are unique, this situation is not unprecedented and it’s important to maintain a long-term perspective when thinking about how a recession might affect you.

What is a recession?

A recession begins after two consecutive quarters (or six months) of negative gross domestic product (GDP) [1]. Recessions are often accompanied by rising unemployment rates and reduced consumer spending.

Recessions are part of the regular economic cycles of many nations, which undulate, making them unavoidable.

Things that cause a recession

A number of situations can throw an economy into a recession. These include:

Unexpected economic events. The COVID-19 pandemic is an example of an economic shock that no one anticipated, and it caused a short but deep recession in 2020.
Debt bubbles. When consumers and businesses are overextended, and then interest rates rise and the debt payments become unaffordable, the economy suffers. The housing crisis in the United States in 2008 is an example of a debt bubble.
Asset bubbles. When markets become overly driven by greed or emotion, unsustainable asset bubbles can develop. The U.S. stock market crash in the 1990’s (often referred to as the “dot com bubble”) is an example of an emotional buying frenzy that led to a recession.
Technological changes. Technology affects how we live and work, and big change often has big consequences. The 19th century industrial revolution automated processes that eliminated entire professions. This created hard times while people who lost their jobs had to adapt and new professions were created.
Inflation. When inflation gets out of control, a country will raise interest rates to temper unsustainable economic growth. This can cause a recession.
Deflation. Too much inflation may be bad, but so too is deflation, during which prices tend to go down, wages decrease, spending slows, and the economy retracts.

Recession vs. depression

Recessions are shorter and less impactful than depressions. While 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. There is no official delineation between a recession and a depression.

The Great Depression lasted 10 years (1929-1939), and is considered the worst depression in history [2].

Recession vs. stagflation

Inflation is economic growth, as evidenced by rising prices of goods and services. It is normal and economically healthy, but only to a point. When inflation gets too high, governments may step in to raise interest rates and temper unsustainable economic growth, and this can cause a recession.

Stagflation is a term used to describe the combination of inflation and economic stagnation (recession), which is rare and seemingly counterintuitive. If inflation is a sign of economic growth and a recession is a sign of economic contraction, how can the two simultaneously exist? But they can, and are usually caused by big changes in commodity prices and economic policy.

What happens in Canada 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 begets itself; people often stop spending money when the cost of essentials rise disproportionately to incomes, 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 (since nobody is buying), which further slows everything down.

Consumer confidence plays a big part in the process. The 2008-2009 “Great Recession” in Canada was driven largely by the United States’ housing market crash, for example [3]. When a toxic combination of financial deregulation and consumers in overextended mortgages came to a head with rising interest rates, it caused financial institutions in the U.S. to collapse. This in turn caused a lack of consumer confidence in the financial sector as a whole, globally, which affected Canada and other countries.

Foreign investors stopped spending money, which affected Canadian exports, stopping Canadian businesses from investing and growing, which in turn affected local employment rates and wages, and sent Canada’s economy and consumer confidence downwards.

The government slowly turned it around in part by lowering interest rates, which 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.

While economic growth is more common, recessions are a normal part of economic cycles. Since 1970, Canada has experienced six recessions:

December 1974 – March 1975.
January 1980 – June 1980.
June 1981 – October 1982.
March 1990 – April 1992.
October 2008 – May 2009.
March 2020 – August 2020.

Recessions are challenging for everybody, but there can be 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 become innovative in tough times, and smaller firms have a chance to carve out a niche when larger businesses are struggling or reshuffling.

Is Canada in a recession right now?

According to the experts, not quite yet. But, in a recent economic forecast, the Royal Bank of Canada predicted a “moderate” recession in 2023 [4].

Typically, the way to deal with inflation is to raise interest rates, which, if done aggressively, can send Canada into a recession. As many are aware, the Bank of Canada just raised its rates by a full percentage point to 2.5%, and another rate hike is expected before the end of 2022.

How to prepare for a recession

Over half of Canadians (56%) are worried or frightened about the state of the current Canadian economy, according to a September 2022 NerdWallet survey conducted online by The Harris Poll among 1,116 Canadians.

A looming recession is a good cue to review your financial plan and create contingencies for circumstances that could negatively affect your finances (like job loss, price hikes and stock market downturns). But remember, recessions are normal, and they don’t last forever.

1. Curb spending

Reduced spending is often a by-product of a recession, but doing it preemptively will 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. If you must seek a loan during times of economic hardship, you’ll need good credit and/or a larger down payment to get approved.

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

In response to the rising costs of goods and services, 65% of Canadian adults say they’ve changed their savings and investing habits over the last six months, according to the NerdWallet survey. Eighteen percent of Canadians say they’ve put less money into their investments than they typically would, and 6% say they’ve sold off some of their investments to free up cash.

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, but remember that every recession in history has been followed by an economic expansion. This is why a recession is a prompt to shore up your financial plan; once that’s in place, stay the course and don’t act impulsively or emotionally.

8. Invest more, if you can

When the markets are down, investment products like stocks are technically on sale. If you’re otherwise financially secure, now may be your opportunity to “buy low,” as the experts often put it.

You’ll need strong conviction, a solid plan, and an understanding that your investments might go down more before they go up. That might be why only 7% of Canadians say they’ve put more money into investments over the last six months than they typically would in response to inflation, according to the NerdWallet survey.

One way to take advantage of market downturns is through dollar cost averaging; setting up automatic transfers into your investment accounts at regular intervals (like bi-weekly or monthly) takes advantage of price fluctuations and eliminates the stress of trying to time the market.

Survey Methodology

This survey was conducted online by The Harris Poll on behalf of NerdWallet from September 6-7, 2022 among 1,116 Canadian adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.8 percentage points using a 95% confidence level. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Marcelo Vilela at [email protected].

A mild recession is predicted in the United States for the remaining months of 2022. Canadian economists predict that a “moderate contraction,” or short recession, will occur in Canada in 2023.

Recessions are an expected part of Canada’s economic cycle, and it’s important to remember that they don’t last forever. To prepare for recession, you might bulk up your emergency fund, pay down existing debts and avoid taking on new debt, and resist the urge to cash out any investments you may have.