The average Canadian household could see a $3,000 reduction in their overall buying power in 2023, according to a recent RBC report. This will likely be caused by higher prices and interest rates across the board.

The same report also predicts that Canada is heading toward an economic recession as early as the first quarter of 2023.

Today, I’ll show you how an economic recession could affect your finances and give you a few tips to ensure that you’re prepared for what’s to come.

Ways an economic recession could hurt your finances:

A recession can have several negative effects on your household finances. Some of the key pressure points that Canadians could feel include:

• Higher interest rates
• Higher cost of goods and services
• It can be harder to find employment (especially for recent graduates)
• There may be pay cuts, or you may not receive bonuses at work
• Investment losses from the stock market potentially declining
• Small businesses may have trouble keeping or getting clients

Below, I’ll cover each of these in a bit more detail so you have a better idea of what to expect.

1. Job loss or reduced hours

When an economic recession occurs, the whole economy suffers. Many businesses may find it hard to retain clients or attract new business. In turn, business owners may have to lay off some of their employees or cut hours in an effort to save money. This could even affect high-performing employees.

If you have a unionized job or a government job, your position may be a bit more secure. However, nothing is promised, so make sure that you do what you can to prove your value to your employer.

2. No bonuses or pay raises

If you’re used to receiving quarterly or annual bonuses, then you may be in for disappointment this coming year. Just as many businesses will have to cut employee hours, they’ll also have to cut additional spending on bonuses and other rewards.

Employees who are scheduled to receive a wage increase could also be affected and may see their raises postponed for the time being. You can ask your employer if this is what to expect and budget your finances accordingly to what they tell you.

3. Harder to find good-paying jobs after university or college

I have some bad news for recent grads – it could be difficult to find employment in your desired career path. Some of the companies you may want to work with will already be laying off employees, which means that hiring new employees is likely the last thing the company is thinking about.

In this case, recent grads may find it easier to join the gig economy, move back in with their parents to save money, or develop new skills and wait for the economy to improve.

4. Lower demand for service-based businesses

If you operate a service-based business such as landscaping, snow shovelling, house washing, or doing custom audio installations, you may see a dramatic drop in your clientele.

As Canadians’ finances are squeezed, many will drop some of the “luxury” services that they were subscribed to. They’ll start taking care of their own maintenance or postponing certain purchases until after the recession.

5. Higher interest rates on credit cards and loans

If you have a credit card with a variable interest rate, then you may see increased interest rates going into 2023. The Bank of Canada recently increased its policy interest rate by 75 basis points to 3.25%, and many Canadians have already seen an increase in credit card interest rates.

6. It will be more difficult to obtain a loan or financing

If you’re applying for a small business loan, trying to mortgage a home, or need to finance a new car, then you’ll likely undergo higher levels of scrutiny. In addition to higher interest rates for all loans, applicants may be subject to more rigorous screening or required to make a higher down payment on the amount they’re financing.

7. Investments could be more volatile

If you’re invested in the stock market, then you may be in for a bumpy ride. Stock prices generally sink during a recession. Investors often lose faith in their investments as companies show reduced earnings, and many people take their money out of the market for fear of heavy losses.

8. Harder to build a business

If you’re thinking about starting a new business, you could run into some difficulties. For one, lenders are less likely to approve small business loans. Secondly, Canadians will be spending less, making it hard to obtain new customers. Lastly, your business expenses and cost of goods may increase as you lose some of your buying power.

During this unstable time, it’s important to save money where you can, spend wisely, and continue to provide value at your job.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.

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