RANDS AND SENSE
By Kondi Nkosi
With inflation at its highest levels in decades, and interest rates rising in response, there are fears that the combination could tip us into a global recession.
Us millennials are no strangers to recessions. Many of us came of age during the recession that was sparked by the Great Financial Crisis in the late 2000s. Of course, more recently we’ve had to contend with the recession caused by the Covid-19 pandemic.
Now it seems another one could be looming as price rises and higher interest rates put the brakes on economic activity.
What is a recession?
A recession is when economic activity slows for two consecutive quarters. It usually lasts months and is generally less severe than an economic depression (which tends to last years).
Recessions can trigger a vicious cycle. People lose jobs and can’t afford to buy the things they used to, so companies sell fewer things, make less profit and then have to lay off workers.
What causes a recession?
Many factors contribute to creating a recession but today’s concerns centre around rising inflation and interest rates.
Inflation is a general rise in prices and a fall in the purchasing power of money. Central banks try to control inflation by using interest rates – which determine the cost of borrowing.
If inflation is high, as now, central banks will raise interest rates. Higher interest rates make borrowing and spending more expensive – and make saving more attractive – so it helps to depress economic activity, which in turn lowers inflation.
But there’s a risk that if interest rates are increased too quickly or by too much, economic activity will slow to the extent that it triggers a recession.
Are we headed for recession now?
Keith Wade, chief economist and strategist at Schroders, says: “There’s around a 35% probability that we are heading for a global recession, but it’s not likely to happen before the end of the year or early next year.”
That means there’s still time for you to prepare your finances for the possibility of a recession – we give you some ideas on how to do this below.
How can I prepare my finances for recession?
1. Pay down credit card debt. One of the common things banks do during a recession is to reduce lending, which could mean your personal credit limit being reduced. The rates and fees on personal credit cards may also increase as interest rates rise, possibly making your existing borrowing more costly.
2. Don’t get caught up in the media hype. Certain financial markets tend not to do well during a recession. For example, Wade warns that stock markets – which have already fallen in the first half of 2022 – could be in for a rough ride. “Stock markets have been struggling recently because of the fear of a global recession,” he says. “If one does materialise, we are likely to see further weakness.”
When investors see the value of their investments start to fall, they might decide to sell to avoid more loss. However, this could mean missing out when the market rebounds, especially for young investors with time on their side.
Be aware that your money is always at risk with investing.
3. Save more. Having a rainy day fund is incredibly important during times of uncertainty. As the economy slows down, so do some employers’ ability to increase salaries and continue hiring. Having some sort of financial cushioning will be helpful.
Kondi Nkosi is country head, Schroders in South Africa.