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Insights & advice

What is a recession?

October 2022 – 15 min read

Key takeaways

  • A recession refers to a short- to medium- period of economic decline.

  • Recessions can result in higher rates of unemployment, reduced trade and manufacturing, and market volatility.

  • Recessions are an unavoidable part of the economic cycle, but having a financial plan in placeOpens in a new window can help you through times of uncertainty.  

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What’s a recession?

A recession refers to a period of economic decline.

During this time, the country’s gross domestic product (GDP), which measures the value of goods and services being produced, drops. Companies make fewer products which leads to fewer sales, and spending decreases overall.

This lack of income can lead to companies having to slash costs, which often means cutting jobs or restructuring. This can lead to high rates of unemployment, which also contributes to the lack of spending required to stimulate the economy.

Banks and lenders may also revisit lending practices and criteria to make it harder to borrow money. This can impact things like the housing market, making it tougher to qualify for a mortgageOpens in a new window as well as other credit accounts.

A lack of consumer confidence also impacts the stock market. Stocks and other investmentsOpens in a new window can drop in value as cautious investors sell or divest to protect their portfolio against losses. Market volatilityOpens in a new window can impact the performance of investments as well as retirement savings accounts.

Recessions are an unavoidable part of every economic cycle. Canada has faced 2 recessions in recent memory – the first taking place after the collapse of the US housing market and subsequent Global Financial Crisis in 2008, and the most recent occurring as a result of the COVID-19 pandemic in 2020.

What causes a recession?

There are several factors that contribute to a recession, including:

A sudden shock to the economy

World events can have a direct impact on the economy, especially negative ones such as a natural disaster, war, terrorist attack or the outbreak of disease or virus. These and other events can cause interruptions to manufacturing and distribution, and create a sense of panic that can impact consumer confidence.

Inflation

Inflation refers to the rising prices of…just about everything. From gasOpens in a new window to cars to homes and groceries, products become more expensive across the country. Governments try to keep inflation within a set limit, and when inflation begins to occur, they may take steps to prevent it from exceeding that limit, such as raising interest rates. 

Rising interest rates

When the Bank of Canada (BoC) raises interest ratesOpens in a new window, it’s to make it more expensive to borrow money. The idea is that the more it costs to borrow, the less people will spend, and this rebalancing of supply and demand will help to curb inflation.   

Lack of consumer confidence

When prices rise and/or general consumers become nervous about the state of the economy, they may become cautious about spending money and start cutting back. On the other hand, they may find themselves unable to spend as usual if they’ve recently become unemployed or have lost wealth in the stock market.

A stock market crash

Investors can become wary or nervous about the performance of the stock market as it reacts to things like war, climate change, and other global events. Events known as “Black Swan” events, which are unpredictable, large-scale negative events (the pandemic being a prime example) can cause the stock market to crash completely – erasing many people’s spending power in the process.

How long does a recession last?

The simple answer is, it depends – but a good rule of thumb is that a recession occurs over a short to medium time period.

When a period of economic decline and struggle becomes prolonged, it’s known as a depression, the most famous of which being the Great Depression that lasted between 1929 and 1939.

Canada has had a total of 6 recessions since 1970, the most recent being the COVID-19 pandemic. According to the C.D. Howe Institute’s Business Cycle Council, that recession began in March 2020Opens a new website in a new window - Opens in a new window  and was declared over on August 9, 2021 – a period of just 18 months.

However long a recession lasts, there are steps you can take to prepare yourself financiallyOpens in a new window to weather economic downturn.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.