How to React to Recessions

If a country’s economy shrinks over two consecutive quarters, that country is said to be experiencing a recession. That is bad for the economy, but how does a recession really impact the average Swiss household? Here, moneyland.ch answers that question, and offers financial tips for getting through a recession.

What are the effects of a recession?

An economic downturn impacts many different parts of everyday life. These are some common effects of recessions:

• Prices

Prices often climb ahead of a recession. Central banks try to counter inflation by raising their key interest rates – and that can mark the beginning of a recession. Whether the consumer prices will sink, stagnate, or climb during an economic decline is difficult to predict in advance. Central banks try to subdue inflation without triggering deflationary developments.

• Employment

A recession usually leads to higher unemployment. When the economy declines, many companies no longer have as much work to do, and the number of available employment positions sinks accordingly. This often results in people being laid off. People looking for jobs also have a much harder time finding employment than they would during an economic boom.

• Income

The rising unemployment results in many households having less money available. Companies may also choose to migrate full-time jobs to part-time jobs, pay lower salaries, or introduce reduced work hours. In this case, employees do not lose their jobs, but do earn less income.

• Stock prices

If you have invested in shares, you should be prepared for a long dry spell. Even before a recession begins, the stock market may become bearish. Stock prices usually already collapse ahead of the recession, but they also begin to recover sooner. So rising stock prices can be an indicator that a recession is nearly over.

• Interest rates

High interest rates are one of the things that can trigger a recession. But that does not mean you will get rich from interest on savings and private account balances at banks during a recession. Central banks will try to pull the economy out of the crisis. One method they employ is to lower the interest rates. Lower interest rates can encourage companies to make investments, which can help drive economic growth. You should count on either earning no interest at all, or earning interest at a rate which is too low to keep up with inflation.

• Real estate

A recession dampens demand – and this normally applies to real estate as well. That can result in the value of real estate falling sharply. Trying to sell your property during a recession can be difficult. It is possible that you will have to settle for a low selling price, or that you will not find a buyer at all.

• Education

In the long term, a recession can have the result that less people get higher education. The reason for this is that when a household’s financial situation worsens, the parents are less able to afford to finance their children over long periods of studying. That effect is most noticeable in countries where higher education is expensive and is paid for by students. In Switzerland, the shift in education is less pronounced because the tuition fees paid by students are low compared to those in many other countries.

What is the best way to survive a recession?

Recessions take a huge toll on many people’s finances. But there are some things you can do to deal with this difficult situation. The basic rule is: the better prepared you are before the recession begins, the easier it will be to survive it. That primarily means planning ahead when times are good, so that you have a financial buffer to see you through the recession.

• Lower your spending

Saving pays off even more when money becomes scarce. The easiest way to build a buffer is by cutting out big purchases whenever possible. There are also numerous ways to lower your basic, necessary spending. You should also consider these budget planning tips.

• Hold financial reserves

Having reserves to cover unexpected costs is always wise. An important point to consider is that reserves will only benefit you if they can be quickly converted to liquid assets without significant losses. Holding enough money to cover your budget for several months as a reserve in a savings account can make sense. While you will not earn high returns on that money, it is always readily accessible, and the risk of losing money is very small. You should resist the temptation to neglect the building of your reserve when money is tight. Depending on your situation, you should consider saving even more money in your liquid reserves if your finances are limited.

• Avoid job hopping

Finding a job becomes exceptionally difficult during a recession. Because of that, it can be beneficial to hold off with changing jobs until the economy begins to thrive again. If you really cannot stand your current job, you may want to wait until you have a guaranteed offer from a different employer before handing in your notice. Give yourself plenty of time for your job search.

• Claim social benefits

In Switzerland, there are many cases in which you can apply for support, when your finances are tight. If you lose your job or have to reduce your work hours, you have the right to claim unemployment benefits. You can find details and information about the size of unemployment benefits in the guide to Swiss unemployment insurance. If you have a relatively low taxable income, you can apply for premium reductions for your mandatory health insurance. As a final social security net to avoid debts or poverty, you can apply for Swiss welfare benefits. And if you are having a difficult time covering your expenses while you study, you should check your eligibility for scholarships.

• Invest defensively

So-called defensive or countercyclical stocks are considered less vulnerable to economic fluctuations. For example, a company which supplies basic foodstuffs will likely continue to experience relatively stable demand for its products during periods of crisis. By contrast, a manufacturer of luxury goods will generally suffer during a recession, because people are less likely to buy these kinds of products. Ideally, your wealth should already be invested defensively before the recession begins, because stock prices often decline early on.

• Sell properties at the right time

If you plan to sell a property in the next few years, then it is very important that you get your timing right. If there is a looming threat of recession, then selling sooner rather than later can make sense. Once real estate prices begin to fall, your only options will be to sit and wait for better times, or to sell your property at a loss.

• Get help

If a recession begins to take a serious toll on your finances, you should get help before the situation becomes unmanageable. Swiss debt counseling offices can help you if you get into financial difficulties. You do not have to be in debt to take advantage of this financial consultation. You can also find tips in this guide to getting out of debt. If a recession results in money gaining value (deflation), that is the ideal time to pay off your debts.

• Keep a level head

On average, recessions last for around one year. If you have financial reserves and consider the other financial tips offered by moneyland.ch, you will likely come out of the recession relatively unscathed – even if you do end up feeling the financial pressure. Hopefully, the recession will be followed by a longer period of growth which will enable you to rebuild your financial resources. You also should not throw out your long-term investment strategy the minute a recession hits. Downcycles are simply a part of long-term investing. You can get a good idea of how recessions affect investment returns – and how quickly Swiss stocks have recovered – by simulating investments with the historical investment return calculator on moneyland.ch.

More on this topic:
How to protect yourself from a stock market crash
How to invest during periods of deflation
How to invest during periods of inflation