Surviving a recession

Typically, a technical recession occurs when a country has had a decline in economic output for two (or more) consecutive quarters. Sometimes, after the initial downward turn, there is some positive growth, but it doesn’t last.

The effects

The first pattern that generally emerges is that people cut back on spending and tend to focus on saving. Unfortunately, this perpetuates a negative cycle. Less spending overall means less consumption, further weakening the economy. And so the cycle continues.

During a recession, banks often cut interest rates to encourage borrowing and investing. Taxes and government spending also change as the government tries to encourage 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

Be wise during a recession. You need to do what you should have been doing anyway, drawing up and sticking to a budget so you do not overspend. But there are a few other things you can do to weather the storm.

Don’t become a co-signer

While you may think you’re doing yourself or someone else a favour, agreeing to be a co-signer on a loan is not a good idea, especially in uncertain times. If the borrower defaults, you will be liable. If it’s your loan, you may not get as good a rate as you would have got if you had taken it solo.

Don’t take on more debt

A recession is not a good time to take out extra debt, except for a home loan, which is used to secure an asset.

Don’t accept an adjustable rate mortgage

It’s not a good idea to have your mortgage interest rate adapted to the lowered recession interest rates with an adjustable rate mortgage, as the minute general interest rates rise, so will your mortgage. This may affect one’s ability to repay to such an extent that the bank has to repossess the property.

Shirley Smith is COO at Old Mutual Finance