If any of your attention has been given to news recently, it’s easy to see that uncertain times lay ahead. There have been some tough challenges for the average Canadian and Canadian’s small businesses the past couple of years. Will these challenges continue in 2019 and cause a recession?
Points of concern:
The recent inversion of the yield curve
On Friday morning a lot of media attention was given to the inversion of the yield curve. The yield curve inverting is one of the main recession indicators.
The yield curve addresses the amount of total income that can be earned from holding cash: 90 days, 3 years, 10 years, etc
When the yield curve inverts, it means that investors are becoming doubtful of the economic future. They react by preferring to hold their cash in short-term over long-term investment vehicles.
Why is the inversion of the yield curve significant?
The inversion of the yield curve preceded all three recessions since 1990. The yield curve inverted in 1989, in 1990 there was a recession. It then inverted again in 2000, in 2001 there was a recession.
The most recent example is the 2008 financial crisis. On this occasion, the yield curve inverted in 2006.
To go one step further, over the last 50 years, the 3-month vs 10-year yield curve has inverted 6 times. Each time it led to 6 different recessions. On average, a recession followed a mere 311 days following the inversion of the 3-month vs 10-year yield curve.
Canadian small business tax changes
The change in taxation rules for incorporated small business has created a disincentive for Canadian small business people to grow operations and create jobs. Traditionally, Canadian small business has been the primary driver of economic growth, creating most jobs and employing most Canadians.
Recent tax changes for small corporations mean there will be less capital leftover inside Canadian businesses to reinvest. Owners are likely to adjust by taking proportionally less risk and scaling back operations or curbing ambitious expansions.
Interest rate increases and consumer debt levels
It’s quite common for interest rates and the stock market to see repeating up and down cycles. The Canadian stock market is approaching a 10 year growth period which is the longest period of growth on record.
Interest rates have started to creep back up, but have not yet reached what we would consider a “normal” level.
Home prices have gotten out of control, leading buyers to stretch themselves financially to secure housing, especially in Toronto and Vancouver.
In addition to that, there seems to be report after report citing statistics on the record levels of consumer debt, student debt, and mortgage debt held by the average Canadian.
With rising interest rates, the crunch will come sooner or later.
The SNC Lavalin scandal and new carbon taxes
Recently our Liberal government has found themselves in hot water in over the SNC Lavalin scandal. Several cabinet ministers have resigned over division on whether or not to prosecute SNC Lavalin, a Canadian engineering company housed in Montreal, for allegations of corruption.
Prime Minister Trudeau has only given us murky details on the affair that has divided his cabinet. Bottom line, regardless of your political leaning, Canadian’s need strong leadership in Ottawa. Lack thereof does not bode Canadians confidence in our government to lead us forward into prosperous economic times.
The Liberal government is looking to introduce Carbon taxes in 2020. The idea is to tax those that use more energy and create a greater carbon footprint. Meet our environmental commitments and raise tax? Sounds like a win, win.
However, there will be an impact, and how it will affect the average Canadian is hard to say. This is not a tax that will just go after rich business people who have excess money to spend frivolously on private jets and luxurious SUVs.
The reality is, this is a blanket tax that will increase the cost of every consumer good in Canada, for those that have excess and those that are barely scraping by.
A tax of such nature is likely to reduce overall consumer consumption by increasing the price of virtually everything, not solely fossil fuel products.
How to prepare:
Ensure that you have a large cash reserve
We know this is advice that you will get from any financial planner, unfortunately, we need to keep repeating ourselves because very few people actually equip themselves with the necessary cash reserves during hard times. It is our recommendation that an individual has several months worth of living (and business) expenses saved up in a readily available, risk-free savings vehicle. Having a cash reserve will not only allow you to stay afloat in hard times, but it also opens up investment opportunities to purchase discounted assets during times of downturn. If cash is king, why does the average person hold very little of it?
If you carry a large amount of personal or business debt, reduce it as much as possible. When the economy hits a dry spell, banks tend to cut their credit offering which can make refinancing or getting additional financing a difficult task.
Do the math
Worried that your monthly mortgage payment might double by the time you go to refinance? Do the calculations and re-work your cash flow and budget to account for the potential payment increase. You can never be too prepared for a financial dry spell. Those who are prepared can use the downturn to leverage themselves and come out further ahead.
Have a plan and the flexibility to change it
We like to ensure that all of our clients have an investment plan for their long-term savings. Whether these savings are comprised of cash, stocks, bonds, managed money, real estate, or any other investment options, make a plan now on what you intend to keep and sell during a potential slowdown. Make a list of potential buyers for assets you might need to part with, because buyers may not be there when you need them.
Do you worry that you don’t have enough cash saved up, or struggle to determine how much you will need in a case of a downturn? Do you want to create an investment plan that will keep you afloat and ahead in a potential economic slowdown?
Give us a call or fill out our contact form, we would happy to meet and discuss your situation.
Now read Part II of this series: How to Prepare for a Recession in Canada – 2019 (Part II)
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.
For more information on inverting yield curves: https://www.investopedia.com/terms/i/invertedyieldcurve.asp