Financial expert Elson Goh recently joined Johanne to discuss a critical topic: navigating a recession. With recent economic shifts dominating the news, many are questioning what a recession truly entails and how best to prepare.

A recession is defined as a slowdown in economic activity, particularly trade and industry, characterised by a fall in GDP over two consecutive quarters. “It often feels like high unemployment, falling inflation, and declining house and equity prices,” he noted. Essentially, during a recession, both people and companies start tightening their belts.

Current Economic Sentiment

There has been much discussion among financial institutions and government officials regarding the state of the economy. Despite reassurances from many, including major players like Goldman Sachs and JP Morgan, there are signs of concern. Elson pointed out, “We are seeing some slowdown, more bankruptcies, and increased anxiety among people and companies.”

He also emphasised that economic data often lags, meaning we might not realise we are in a recession until it has already happened. The indicators are there, but the official confirmation may come later. When the economy is overheated, leading to high inflation, central banks may raise interest rates to cool things down. This reduced spending can then trigger a recession. “In economic theory, a recession is like a circuit breaker, a reset mechanism,” he said.

Predicting a Recession

Predicting a recession is notoriously difficult. While institutions like JP Morgan and Goldman Sachs increase their estimates of the likelihood of a recession, it’s still largely a matter of odds. Elson mentioned several leading indicators that economists use to predict recessions. One serious indicator Elson highlighted is the 10-year to 2-year treasury bond spread. “When you get a negative spread, a recession is likely to follow,” he explained. Currently, this spread is negative, fueling concerns within the industry.

How to Prepare for a Recession

Preparation is key to weathering a recession. Elson offered some practical advice on how to prepare:

  1. Liquidity Ratio: Ensure you have three to six months’ worth of expenses saved in a high-interest savings account. “The government guarantees up to $250,000 in certain accounts, so your money is safe,” Elson reassured.
  2. Solvency Ratio: Assess your debt levels and try to reduce them. “If you’re swimming in debt, make extra repayments now,” he advised.
  3. Recession Plan: Have a plan in place for what you would do if you lose your job or your hours are cut. Elson recommended sitting down with your family to discuss this possibility and how you could manage it.
  4. Invest in Yourself: During a recession, being the most valuable person in your workplace is crucial. Elson suggested investing in skills that make you indispensable.
  5. Discretionary vs. Non-Discretionary Spending: Identify areas where you can cut back on spending. “Try living without that streaming subscription for a month as a test,” he suggested.
  6. Family Support: Discuss with your extended family how you could support each other during tough times. “Family support is crucial during a recession,” Elson emphasised.

Recessions are a natural part of economic cycles, but they can be challenging to navigate. By understanding what a recession entails and taking proactive steps, you can better protect yourself and your family. As Elson said, “It’s all about being prepared and having those difficult conversations before the recession hits.”

Listen to Elson’s full conversation with Johanne below.