The Most Expected Recession: What You Need to Know and How to Prepare

The word “recession” can strike fear in the hearts of many people, especially those who remember the devastating effects of the Great Recession of 2007-2009. A recession is defined as a significant decline in economic activity that is spread across the economy and that lasts more than a few months¹. Recessions are part of the normal business cycle, but they can also have serious consequences for individuals, businesses, and governments.

In 2022, the global economy experienced a sharp slowdown due to the coronavirus pandemic, which caused widespread lockdowns, travel restrictions, and supply chain disruptions. The U.S. economy contracted by 3.5% in 2020, the worst performance since 1946². However, thanks to the rapid development and distribution of vaccines, as well as unprecedented fiscal and monetary stimulus, the global economy rebounded strongly in 2021, with an estimated growth rate of 5.9%³.

But is this recovery sustainable? And are we heading for another recession in 2023? The answer is not clear-cut, as different regions and sectors face different challenges and opportunities. According to the World Economic Forum’s Chief Economists Outlook 2023⁴, chief economists are completely divided on what will happen in 2023, with some predicting a continued expansion and others forecasting a downturn.

Some of the factors that could trigger a recession in 2023 include:

• Inflation: Inflation is the general increase in the prices of goods and services over time. Inflation reduces the purchasing power of money and erodes the value of savings and investments. Inflation can also lead to higher interest rates, which make borrowing more expensive and discourage spending and investment. Inflation has been soaring in 2022, reaching its highest level in 40 years in the U.S., at 8.2%⁵. Some of the causes of inflation include supply chain bottlenecks, labor shortages, rising energy costs, and excess demand fueled by stimulus measures. While some economists believe that inflation is transitory and will subside as the economy normalizes, others warn that inflation could become persistent and destabilize the economy.
• Interest rates: Interest rates are the cost of borrowing money or the return on lending money. Interest rates affect many aspects of the economy, such as consumer spending, business investment, government borrowing, exchange rates, and asset prices. Interest rates are determined by the supply and demand for money in the market, as well as by the actions of central banks. Central banks use interest rates as a tool to influence economic activity and inflation. When the economy is weak or inflation is low, central banks lower interest rates to stimulate growth and spending. When the economy is strong or inflation is high, central banks raise interest rates to cool down the economy and curb inflation. In 2020 and 2021, central banks around the world slashed interest rates to near-zero levels to support the economy during the pandemic crisis. However, as inflation pressures mount and growth prospects improve, some central banks have started to tighten their monetary policy by raising interest rates or signaling their intention to do so in the near future. For example, the Bank of England raised its benchmark rate from 0.1% to 0.25% in December 2022⁶, while the Federal Reserve indicated that it could hike its rate three times in 2023⁷. Higher interest rates could dampen economic activity by making borrowing more costly and reducing disposable income. Higher interest rates could also trigger a sell-off in financial markets, as investors adjust their expectations and seek higher returns elsewhere.
• Financial markets: Financial markets are where buyers and sellers trade financial assets such as stocks, bonds, currencies, commodities, derivatives, etc. Financial markets reflect the expectations and sentiments of investors about the future performance of the economy and individual companies. Financial markets also provide liquidity and capital for businesses and consumers to finance their activities. Financial markets can have a positive or negative impact on the economy, depending on their movements and volatility. When financial markets are rising and stable, they boost confidence and wealth effects, which encourage spending and investment. When financial markets are falling and volatile, they erode confidence and wealth effects, which discourage spending and investment. Financial markets can also be affected by external shocks such as geopolitical events, natural disasters, pandemics, cyberattacks, etc., which can create uncertainty and panic among investors. Financial markets have been highly volatile in 2022, due to various factors such as inflation fears, interest rate expectations, Covid-19 variants, trade tensions, etc. A major correction or crash in financial markets could trigger a recession by reducing consumer and business confidence, wealth, and access to credit.

How to prepare for a recession

While no one can predict with certainty when or if a recession will occur in 2023, it is always prudent to be prepared for the possibility of one. Here are some tips on how to manage your money during a recession:

• Start with a spending plan: A spending plan is a simple way to track your income and expenses, and to allocate your money according to your goals and priorities. A spending plan can help you identify where you can save money, where you can spend money, and where you can invest money. A spending plan can also help you avoid overspending, under-saving, and accumulating debt. To create a spending plan, you need to list your sources of income, such as salary, dividends, interest, etc., and your categories of expenses, such as housing, food, transportation, entertainment, etc. Then, you need to compare your income and expenses, and adjust them accordingly to achieve a positive cash flow (income > expenses) and a balanced budget (income = expenses). You can use a spreadsheet, an app, or a pen and paper to create and monitor your spending plan. A spending plan can help you prepare for a recession by giving you more control over your finances and allowing you to make informed decisions about your money.
• Bolster your savings: Savings are the amount of money that you set aside for future use, such as emergencies, opportunities, or goals. Savings can provide you with a cushion of financial security and flexibility in case of unexpected events or changes in your income or expenses. Savings can also help you achieve your short-term or long-term objectives, such as buying a car, going on a vacation, or retiring comfortably. To boost your savings, you need to pay yourself first by setting aside a portion of your income before you spend it on anything else. You can automate this process by using direct deposit or automatic transfer to move money from your checking account to your savings account every month. You also need to choose the right savings vehicle for your needs and preferences, such as a high-yield savings account, a certificate of deposit (CD), or a money market account. You should aim to have at least six months’ worth of living expenses in an emergency fund that is easily accessible and liquid. You should also save for other specific purposes that are important to you, such as education, travel, or home improvement. Bolstering your savings can help you prepare for a recession by giving you more peace of mind and resilience in the face of financial challenges or opportunities.
• Curate your credit: Credit is the ability to borrow money from a lender and repay it over time with interest. Credit can be useful for financing large purchases or investments that you cannot afford with cash alone, such as a house, a car, or a business. Credit can also be helpful for smoothing out temporary cash flow problems or taking advantage of attractive deals or rewards. However, credit can also be costly and risky if not used wisely and responsibly. Credit can incur high interest charges and fees that reduce your net worth and cash flow. Credit can also damage your credit score and reputation if you fail to make timely and full payments or default on your obligations. Credit can also lead to debt traps and stress if you borrow more than you can afford to repay or if you use credit for unnecessary or frivolous expenses. To curate your credit, you need to use it sparingly and strategically for essential or productive purposes only. You also need to compare different credit options and choose the one that offers the best terms and conditions for your situation, such as the lowest interest rate, the shortest repayment period, the most flexible features, etc. You also need to pay off your credit balances as soon as possible and avoid carrying over any debt from month to month. You also need to monitor your credit report and score regularly and correct any errors or discrepancies that may affect your creditworthiness. Curating your credit can help you prepare for a recession by reducing your debt burden and interest costs, improving your credit score and reputation, and preserving your access to credit in case of emergencies or opportunities.
• Study your student loan strategy: Student loans are a type of credit that is used to pay for education-related expenses, such as tuition, fees, books, supplies, etc. Student loans can be beneficial for increasing your human capital and earning potential by enabling you to pursue higher education or advanced skills. Student loans can also be advantageous for deferring or reducing the upfront cost of education by allowing you to repay them over time with interest. However, student loans can also be burdensome and stressful if they exceed your expected income or career prospects after graduation. Student loans can also be difficult and complex to manage due to their various types (federal vs private), terms (subsidized vs unsubsidized), repayment plans (standard vs income-driven), forgiveness programs (public service vs teacher), etc. To study your student loan strategy, you need to understand the details and implications of each student loan option that is available to you or that you have already taken out. You also need to evaluate the costs and benefits of each student loan option in relation to your current financial situation and future goals.

• You also need to choose the best student loan strategy for your needs and preferences, such as the lowest interest rate, the longest repayment period, the most generous forgiveness program, etc. You also need to make timely and full payments on your student loans and avoid defaulting or delinquency. You also need to explore other options for reducing or eliminating your student debt, such as scholarships, grants, work-study, refinancing, consolidation, etc. Studying your student loan strategy can help you prepare for a recession by minimizing your student debt burden and interest costs, maximizing your student debt relief and forgiveness opportunities, and enhancing your financial literacy and responsibility.

  • Diversify your investments: Investments are the allocation of money or other resources to an asset or a venture with the expectation of generating income or appreciation in the future. Investments can be beneficial for growing your wealth and achieving your financial goals over time by taking advantage of the power of compounding and the potential of higher returns. Investments can also be risky and uncertain due to the volatility and unpredictability of the market and the performance of individual assets or ventures. To diversify your investments, you need to spread your money or resources across different types of assets or ventures that have different characteristics and behaviors, such as stocks, bonds, real estate, commodities, etc. You also need to balance your risk and return profile by choosing the appropriate mix of assets or ventures that match your risk tolerance, time horizon, and objectives. You also need to review and rebalance your portfolio periodically to ensure that it reflects your current situation and preferences. Diversifying your investments can help you prepare for a recession by reducing your exposure to specific risks and shocks, enhancing your returns and stability, and optimizing your asset allocation and performance.

  • Upgrade your skills: Skills are the abilities and knowledge that enable you to perform tasks or activities effectively and efficiently. Skills can be acquired through education, training, experience, or practice. Skills can be classified into two categories: hard skills and soft skills. Hard skills are technical or specific skills that are related to a particular field or profession, such as accounting, programming, engineering, etc. Soft skills are general or interpersonal skills that are applicable to any field or profession, such as communication, teamwork, problem-solving, etc. To upgrade your skills, you need to identify the skills that are in high demand or relevant to your current or desired career path. You also need to seek opportunities for learning and development that suit your needs and preferences, such as online courses, workshops, certifications, mentoring, etc. You also need to apply and practice your skills in real-world situations and get feedback and improvement suggestions from others. Upgrading your skills can help you prepare for a recession by increasing your employability and competitiveness, enhancing your productivity and performance, and expanding your career options and opportunities.

  These are some of the ways you can prepare for a recession in 2023. By following these tips, you can improve your financial situation and well-being, regardless of whether a recession occurs or not. Remember that a recession is not the end of the world, but rather an opportunity for growth and change. As the saying goes: “When one door closes, another one opens.”