Back in 2019, we published 2 blog posts: How to Prepare for a Recession in Canada – 2019; and, How to Prepare for a Recession in Canada – 2019 (Part II) (if you haven’t read them, we highly suggest it). In that two-part series, we look at several economic points of concern and how to make sure you’re prepared for a recession.
Since they were so well received, we thought we would do a check up. See how the economic points of concern we addressed have shifted and understand what information is still relevant.
Never miss out on an opportunity like a good recession.
Jack Welch
How to Prepare for a Recession in Canada – 2019
In the first article of the two part series, we address several points of concern:
- The recent inversion of the yield curve
- Canadian small business tax changes
- Interest rate increases and consumer debt levels
- The SNC Lavalin scandal and new carbon taxes
All of these issues and topics caught significant attention back in early 2019. Are they still relevant in the 2020 economic landscape? Lets find out!
Yield Curve Inversion
After inverting originally in late March of 2019, the yield curve quickly righted itself before the beginning of April. However, that was short lived. The 10 year vs. 3 month yield curve inverted again on May 23, 2019 and remained that way until Oct 11, 2019, other than a single day of reversion to the mean on July 23.
After Oct 11, 2019 the yield curve steepened slightly till near the end of Jan 2020. Recently, the yield curve has been dancing right around 0.
Like we outlined originally, the yield curve inversion is significant because it has preceded the previous 6 recessions. This inversion occurred roughly 311 days prior to a recession. 311 days since the March 2019 inversion would have fallen on Jan 28, 2020.
Does this mean a recession is going to happen? Probably eventually. But there are many factors at play and only time can tell.
Canadian Small Business Tax Changes
There haven’t been any additional small business tax changes that are noteworthy.
Interest Rate Increases and Consumer Debt Levels
Since July of 2017, the Prime Lending rate has increased by 1.25% to its current level of 3.95%. Although this is closer to “normal” rate levels, rates are still significantly lower than the average going back to 1960 (~7.5%).
Furthermore, rates have not moved since November 2018.
Part of the reason that rates have not risen is because of their relationship with inflation. To learn more about this read Inflation: The Thief of Your Future.
Another reason is because of the grotesque amount of consumer debt. If interest rates are increased, it could and most likely would, push a lot of Canadians into bankruptcy.
Household debt in Canada has ballooned to $2.26 Trillion. Yes, Trillion, with a “T”. As a percentage of disposable income, Canadian household debt is 174.01%.
Imagine that the average interest rate on the $2.26 Trillion is 3.95% If interest rates increase only 1% to 4.95%, that would amount to additional interest payments of more than $22.5 Billion. Considering nearly 50% of Canadians are within $200 of insolvency, I have a hard time believing everyone would be able to make the increased debt payments.
SNC Lavalin Scandal
I think we all know how this played out from a political standpoint with Mr. Good Hair (and now Good Beard?) still in office. How did it play out for SNC Lavalin specifically though?
Well, with the stock price being at near all-time highs in July of 2018, they had what you could call, a fall from grace. SNC.TO (their ticker) dropped from its peak of $57.61/share on July 1, 2018, to its trough of $16.00 in September 2019.
However, since that time SNC Lavalin has made a decent recovery. Rebounding to its current price of $33.75 at the time of writing.
Now that we have recapped the main points, how do we use this to help make sure we are in a good spot and prepared for whatever comes our way?
How to Prepare For a Recession:
The advice that we gave nearly a year ago on how to prepare for a recession is still applicable today.
Have a Large Cash Reserve
This is advice that you will receive from any financial planner. However, very few people have actually been diligent in create a sufficient cash reserve. For this reason, it bares repeating.
It is our recommendation that everyone have 3-6 months of living expenses stored in your cash reserve. As times get tougher, the size of your reserve should increase.
For more information on cash reserves you can read Emergency Fund 101.
Deleverage Yourself
This is fairly simple. If you have large amounts of debt, especially with high interest rates, make paying it off a priority. When the economy hits a dry spell, banks tend to cut their credit offering. This 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.
Failing to plan can lead to increase hardships. Maybe you don’t have a cash reserve in 6 months time and you really need money to live. Well now you might be forced into a situation when you have to sell something, or a lot of somethings, at a loss.
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 a savings 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.
Share your thoughts with us!
Leave a comment down below of ways that you prepare for a recession that we didn’t include in this article.
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