The chances of recession are growing for 2023. What should I do now?

Published: 7 min read
The chances of recession are growing for 2023. what should I do now

The Russian invasion of Ukraine and the COVID-19 pandemic have slowed the global economy even more. According to the latest Global Economic Prospects report from the World Bank, this could start a long period of slow growth and high inflation. This increases the chance of stagflation, which could be bad for both middle-income and low-income economies.

The world's economy is expected to slow down from 5.7% growth in 2021 to 2.9% growth in 2022. This is much less than the 4.1% growth that was expected in January. It is likely to remain at that level through 2023 and 2024, as the Ukraine conflict negatively impacts activity, investment, and trade in the short term, pent-up demand fades, and fiscal and monetary policy accommodation is removed. Because of the damage caused by the pandemic and the war, the per capita income in developing economies will be almost 5% lower this year than it was before the pandemic.

Even though global inflation is expected to decline next year, it will likely stay above inflation targets in several countries. However, according to the June Global Economic Prospects, should inflation remain high, it could lead to another bout of a global downturn and financial crises within many developing markets and economies.

The report also sheds light on the hazy outlook for global economic growth caused by the war's impact on energy markets. In response to the Ukraine conflict, there has been an increase in the price of energy-related commodities. Real incomes, production costs, financial conditions, and macroeconomic policy will be constrained by higher energy prices, particularly in energy-importing countries.

Abdul Saboor, a Full Stack Developer at The Stock Dork, says, "Late next year and early in 2024, the U.S. economy is projected to take a significant hit from the additional Fed tightening."

War in Ukraine, China lockdowns, effects of Covid 19, supply chain disruptions, and stagflation risk are all hurting growth. A recession is inevitable in many countries.

How does the current situation resemble and differ from the 1970s stagflation?

Slow economic growth and high unemployment, or economic stagnation, accompanied by inflation, are signs of stagflation. Stagflation can also be defined as a time when prices go up but the gross domestic product (GDP) goes down.

With a focus on how stagflation could affect emerging markets and developing economies, the June Global Economic Prospects report offers a systematic comparison of current global economic conditions with those of the 1970s stagflation.

The current situation resembles that of the 1970s in three aspects:

  • Continuous supply-side disruptions boost inflation, followed by a long period of highly accommodative monetary policy in major developed economies.
  • There is a potential for diminishing growth.
  • The risks emerging markets and developing economies endure regarding monetary policy tightening are required to mitigate rising prices.

The current situation is reminiscent of the 1970s stagflation, which was characterized by high inflation, low growth, and high unemployment, says Daniel Chan, CTO of Marketplace Fairness.

Even with the similarities, the current situation differs from the 1970s on multiple levels. At the moment, the value of the dollar is more substantial than it was in the 1970s. The rate of increase in the commodities prices is lower. Lastly, major financial organizations' balance sheets are reasonably solid. Furthermore, in contrast to the 1970s, central banks in developed and developing economies have clear instructions to keep prices stable, and, over the past 30 years, they have shown that they can be trusted to meet their inflation goals.

How can you recession-proof your finances?

With the fear of a recession looming on the horizon, there are a few things that can help you recession-proof your finances:

Pay off your high-interest credit card debts

As the Federal Reserve continues to increase its credit standards for borrowers, it's best to pay down the high-interest debts before you fall into an unforeseen emergency. According to Bankrate, even at the Fed's lowest rate, a credit card's average annual percentage rate (APR) was close to 16%. So, if the Federal Reserve increases the APR, it could cost you hundreds or even thousands of dollars a month to carry a balance. If you get rid of that debt, you might have more room in your budget, which you could use to build up your emergency fund.

Build an emergency fund

Let's say you lost your job, are between jobs, or don't have enough money to pay for unplanned expenses. This is when you'll be glad you have a savings account. Here's what you do: every month, you put a little bit of money from your paycheck into your savings account. When you're done, you should have saved at least three to six months' worth of pay in it. You also have to promise not to touch the money until you need it.

It might seem hard to save up enough money that's worth six months of income, but don't underestimate the power of small donations. By regularly adding to your savings account, you can develop the important habit of saving. Even better, make your contributions automatic so that the process can run on its own.

Think about your career and how you can make more money

The best thing that you can do to recession-proof yourself is to focus on your career and education. Learning more about your field of work, trying something new, or even focusing more on a certain hobby may help you boost your income.

When you improve yourself and put more skills under your belt, you get the opportunity to climb up the financial ladder. By putting effort into building your career, you are increasing your income more and more. This will help you have more flexibility when the recession hits.

Look for places to cut off unnecessary expenses

If you want to free up money that you can put back into your savings account, it's always a good idea to look at your monthly expenses and determine which ones are necessities and which ones you can live without.

It is recommended that you spend no more than 30% of your net income on discretionary items. An excellent way to ensure you aren't living beyond your means is to set aside money each month. When the economy is booming, taking these steps now can help you succeed later on when times are tough.

Can you use the recession to your advantage? If so, then how?

Even during a recession, you can find ways to make the economic downturn work in your favor.

Let's see a few ways that will help you take advantage of the upcoming recession:

Investing through the dollar-cost averaging method

When it comes to economic downturns, you never know when one will hit. However, a stock market sell-off will almost certainly occur well before a recession. Whenever that happens, remember that there is recovery after a downturn.

The idea behind dollar-cost averaging (DCA) is to spread out an investor's total investment across multiple purchases of a particular asset over time to minimize the impact of price fluctuations on the overall purchase. Regular purchases are made regardless of the asset's value.

When you dollar-cost-average your investments, you gradually reduce your overall cost basis in the share price so that when the price rises, your cost basis remains lower than the price. For instance, if you put $500 a month into a mutual fund selling shares for $25 each, your money will buy 20 shares. If the price of a share falls to $20, your contribution will buy 25 shares at that price. Now, you have 45 shares in your account, and the average cost basis is $22.

If you are planning on holding stocks during the recessionary period, it's best to go for large-cap stocks with a good standing and easy cash flow.

Invest in dividends

Dividends serve several purposes for investors. For starters, if a company has a long history of increasing and paying dividends, you can rest assured that it is financially sound and capable of withstanding most economic conditions. In addition, dividends provide a financial cushion for the long term. Although stock prices fall, you still get your money back. Dividend stocks tend to perform better during downturns for these reasons.

Investing in dividend-paying stocks is best done through mutual funds or exchange-traded funds (ETFs). High current yields and capital appreciation can be achieved by investing in dividend-paying companies with long histories and strong track records of dividend increases.

Buy your own house instead of renting

During a recessionary period, real estate prices and interest rates would be lower, so it would be the best time to buy a house for a lower price than it is now. Currently, the status between renting and owning has changed in the past few years, and owning your own space is coming out on top.

Refinancing debt

In an economic downturn, you can smartly refinance your debt and save a lot of money in the long run. During this time, most rates will go down, so refinancing your debt to a better deal may help ease a lot of the financial burden that comes with debt.

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