Recession

Two quarters of falling GDP, and why that is only a shorthand

The rule of thumb everyone quotes is simple: two consecutive quarters of declining GDP equals a recession. Economists treat it as a starting point rather than the definition. A genuine recession is a contraction with breadth and persistence: output falling, yes, but also employment, incomes and business activity weakening together across much of the economy.

The distinction matters. An economy can print two slightly negative quarters while jobs and incomes keep growing, which few would experience as a recession. In Canada, the dating of business cycles is generally left to the C.D. Howe Institute's Business Cycle Council, which weighs the breadth and depth of a downturn rather than mechanically counting quarters, and typically declares recessions long after they have started, sometimes after they have ended.

What happens during a recession

For households, a recession is felt first through work. Companies facing falling sales freeze hiring and eventually lay people off, so unemployment rises and job searches stretch out. Spending retreats, especially on big-ticket purchases, and inflation usually cools as demand weakens.

Interest rates typically fall. Cooling inflation and rising unemployment are exactly the conditions that push the Bank of Canada to cut its policy rate to cushion the downturn, and those cuts ripple out to variable mortgage rates, lines of credit and, eventually, savings rates. A recession is painful, but for borrowers it is usually a falling-rate environment.

The market is not the economy

The stock market and the economy are related, but they run on different clocks. Markets price in expectations, so they often fall into a bear market before the recession shows up in the data, and start recovering before the economy does, while the news is still at its darkest. By the time a recession is officially declared, much of the market damage has often already happened; by the time it is declared over, much of the recovery has too.

That timing mismatch is the trap. Selling when the recession makes headlines usually means selling after the fall, and waiting for clearly good news before buying back means missing the rebound. Portfolio decisions keyed to economic headlines tend to be late twice.

Your recession survival kit

You cannot schedule recessions, but you can be built for them. The kit is short:

• An emergency fund. This is the recession tool. An emergency fund covering three to six months of essential expenses turns a layoff from a catastrophe into a hard stretch.
• Hands off the investments. A recession is precisely when panic-selling does the most damage, since markets tend to bottom while conditions still look terrible. If contributions can continue, they are buying at lower prices.
• Know that EI exists. Employment Insurance replaces part of your income after a job loss. It is not generous, but combined with an emergency fund it substantially extends your runway; apply immediately.
• Remember that recessions end. Every Canadian recession so far has given way to an expansion, and expansions have historically lasted far longer than the contractions between them.