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Financial planning tips

Brighter life
July 08, 2015

Is Canada in recession?

The numbers aren’t all in yet, but it’s a distinct possibility. Here are seven steps to consider in hard times.

The technical definition of a recession is two consecutive quarters of negative gross domestic product (GDP) growth. By that measure, it is too early to say that Canadians need worry about the R-word. But given that we saw the national economy shrink in January, February, March and April, we could be headed in that direction. Statistics Canada reported last week that GDP fell 0.1% in April.

This is a disappointment, but no surprise. We knew that the sharp drop in oil prices last year would impact the oil patch and much of the industry surrounding it. In January, Sadiq Adatia, chief investment officer of Sun Life Global Investments, explained that oil at $50 a barrel costs the Canadian economy “about a 2% [drop in] nominal gross domestic product.” The U.S. benchmark West Texas intermediate crude was in the low 50s when I submitted this post.

Add to that a slower-than-expected U.S. recovery and you get a recipe for coast-to-coast sluggishness.

“This is the worst we’ve ever felt about the Canadian economy,” Adatia told me in January. “We still have the high debt levels that we were worried about. We were always worried about the real estate market … I think the government is going to be hard-pressed to keep this economy afloat.”

So hard-pressed that the Bank of Canada lowered its target for the overnight interest rate – by 25 basis points to 0.75% – shortly after my interview with Adatia. A second cut is now a real possibility, even as the U.S. Federal Reserve prepares to raise rates.

What can you and I do about all this? Seven recommendations:

  1. Pay down your debt. Focus first on whatever debt has the highest interest rate attached to it. And don’t get sucked in by the availability of cheap credit, unless you’re awash in black ink.
  2. If your debt is in control, build an emergency fund. Think about the risks you and your family face, and save accordingly. Is your car more than a few years old? Save for a couple of trips to the mechanic. Is job loss a possibility? Maybe work on stashing away the equivalent of six or so months of salary. Don’t overthink it. Any size emergency fund is better than nothing. Talk to your financial advisor about a tax-free savings account, a high-interest savings account or other options that will earn you interest.
  3. Speaking of which, talk to a financial advisor. In today’s low interest-rate environment, professional advice about saving plans and investment strategies adds tremendous value.
  4. And hire a chartered accountant while you’re at it. My wife and I stopped doing our own taxes right after we were married. I can’t believe we didn’t stop sooner. Chartered accountants provide a ton of value.
  5. Rebalance your portfolio. Say your money is spread across three asset classes. You have $10,000 in guaranteed investment certificates, $40,000 in bonds and $50,000 in stocks. After a period in which stocks outperform, the value of these three pools of money is $10,500, $29,500 and $60,000 respectively. Without having made any investment decisions, your percentage allocations have changed from 10%/40%/50% to 10.5%/29.5%/60%. Let too much time pass and your portfolio can get unbalanced.
  6. Network. If you’re not seeing industry colleagues enough, make it a priority. This isn’t a bad time to freshen up your resume, either.
  7. Spend less. Take another look at all of your repeating expenses: the cable bill, the phone bill, all those small monthly payments that add up over the course of the year. Do you really need to subscribe to a music streaming service?

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