What Happens In A Resession?

Even though we might not know exactly what a recession is, we do know one thing about this much-feared word – it’s bad news. Unfortunately, our investment rating is almost certain to be downgraded to junk status officially by Moody’s this month and it was also made official last week that South Africa is in its second recession in two years. So what is a recession exactly, and how can we survive it?

WHAT IS A RECESSION?

Typically, a technical recession occurs when a country has had a decline in economic output for two (or more) consecutive quarters. Unfortunately, as outlined by the latest official figures the economy declined by 1.4 per cent in the fourth quarter of 2019. The decline came after a 0.8 per cent drop in economic output during the previous quarter, leading the country to its second recession.

THE EFFECTS OF A RECESSION

The first thing that usually happens in a recession is that people cut back on their spending. With the uncertainty that goes hand in hand with a recession, people tend to focus on saving. Less spending overall means less consumption, further weakening the economy.

During a recession, banks often cut interest rates to encourage borrowing and investing (an attempt to stimulate the economy). Taxes and government spending also change as the government tries to encourage economic growth through policy change. In the long term, however, this strategy could negatively affect the economy by increasing interest rates.

HOW TO SURVIVE A RECESSION

It’s important to be wise during a recession. You need to do what you should have been doing anyway – drawing up and sticking to a budget so that you do not overspend. But there are a few other things you can do to weather the storm.

DON’T BECOME A COSIGNER

While you may think you are doing yourself or someone you care about a favour, agreeing to be a cosigner on a loan is not a good idea, especially in uncertain times. The reality is that if the borrower defaults on the payments, you will be liable. If it’s your loan, you may not get as good a rate as you would have gotten if you had taken it on solo.

DON’T TAKE ON MORE DEBT

When in the middle of a recession, it’s definitely not a good idea to take out extra debt. You should be trying to pay off your debt as soon as possible. Learn to be patient and buy only what you need. Things you want should wait until you have the money to do so.

DON’T ACCEPT AN ADJUSTABLE-RATE HOME LOAN

While it may seem like a good idea to have your home loan interest rate adapted to the lowered recession interest rates with an adjustable-rate home loan, it’s important to realise that the minute general interest rates rise, so will your mortgage. It’s important at times like these to ensure that you play it safe with a fixed interest rate.