As the Bank of Canada raises interest rates to keep pace with spiralling inflation and the stock market performance dims as the economy runs out of room to grow, it appears a perfect storm is brewing for a recession to strike. The concern is that as the central banks raise interest rates to control inflation, borrowing costs will also rise to such a high level as to slow economic growth and cause a recession. This comes at a time when the Bank of Canada has warned it may be forced to raise its benchmark interest rate from the current 1.5% to 3% or more if inflation does not start falling.
Meanwhile, the World Bank is warning of possible stagflation which is often characterised by quick consumer price increases, slow economic output, and high unemployment. Stagflation would be a recession worsened by prolonged high inflation.
While some financial experts, like CIBC economist Katherine Judge, hesitate in sounding the alarm, they indicate that should it happen, a recession would likely start from late 2022 to early 2023. Judge however predicts that such a recession would not be as severe as it was in 2008, as the Bank of Canada and US Federal Reserve were likely to hike rates, but not excessively so while keeping just under market pricing.
No matter the outcome, young Canadians are however being advised to prepare themselves. Personal finance educator, Kelley Keehn, recommends recession-proofing by broadening one’s skillsets. She recommended pursuing new certifications and courses, reading books, networking, and following relevant social media channels and influencers who could help in keeping attuned to the job market and learning when to make critical moves.
Keehn further advised evaluating savings and spending to determine what was actually adding value or hurting finances. She said that this was especially important now when the world was reopening after the pandemic and spending opportunities were increasing.
Motley Fool’s Brian Feroldi is also advising Canadians to reserve as much cash as possible. He recommends a safety margin of at least six months’ worth of living expenses in cash. Not just to cover expenses, but also to take advantage of investment opportunities as recessions often lead to market declines that could make for some very cheap buys of good stocks.
Dividend-growth stocks are considered the best investment option as they are recession-resilient and will often still provide a cash return even during a downturn in the market. Keehn advises young investors to evaluate their financial capabilities and limitations before investing in the stock market. She recommends weighing the pros and cons between investing and simply saving money at such a time.
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