The Great Recession changed the course of my early adult life. I was about to graduate in 2008 when the subprime mortgage crisis spiraled into a global financial shock. The S&P 500 dropped roughly 57%, U.S. GDP fell by 3.8% and employment declined by 6%. In the European Union, GDP fell about 4.4% in 2009 and roughly 6.7 million jobs were lost between 2008 and 2013.
Canada fared somewhat better: its GDP dipped about 3.6% over three quarters in 2008–2009 before recovering, and employment fell only around 1.8% in that period. Still, uncertainty and fear were widespread. Homeownership and retirement plans were overturned, and headlines suggested jobs would be scarce for years. I chose to delay entering a hostile job market and enrolled in graduate school.
The global economy eventually recovered, but the lessons of that crisis remained embedded in policy and behavior.
What happened after the recession in 2008
Following the Great Recession, the United States experienced its longest economic expansion in modern history, lasting about 11 years. Stock markets in both Canada and the U.S. reached record highs, and unemployment dropped to historically low levels in many countries.
Then the COVID-19 pandemic arrived and disrupted that expansion. Markets reacted violently to lockdowns, supply chain interruptions and travel bans. The Dow plunged thousands of points in late February and early March 2020, and North America entered a very short recession that lasted only two months, from February to April 2020.
More money chasing fewer goods led to high inflation.
That contraction was brief in part because central banks and governments moved aggressively to prevent a sustained deflationary spiral. Interest rates were slashed to near zero and pandemic relief programs injected large amounts of cash into households and businesses. Those policies were understandable and likely prevented a deeper, longer downturn, but they carried long-term consequences.
Now that the immediate health emergency is waning, the economic aftereffects are clearer: high inflation, strained supply chains and asset price shifts have reshaped the outlook. Many people are asking whether a deeper recession is imminent.
What is a recession?
By technical definition, a recession is two consecutive quarters of negative GDP growth. Because it takes six months to meet that standard, many recessions are only identified in hindsight. Typical recessions vary in severity and often last close to a year, though they can be shorter or longer depending on the cause.
Will there be a recession in 2023?
Economists generally expect that if a recession occurs soon, it will be mild. The cause of a downturn matters: a sector-specific slump tends to produce a shallower recession than one triggered by a widespread financial imbalance like the housing-related debt crisis of 2008.
If a recession is driven primarily by high interest rates and inflation, it will likely be shorter and less severe than one caused by systemic debt failures. Rapidly rising rates are designed to cool demand, and excess liquidity—while contributing to inflation—is easier for policymakers to withdraw than to repair structural debt problems.
The effects of the rate hikes can already be seen. Families and businesses have already started spending less, housing prices have stalled and the stock market has pulled back.
Another reason to expect a milder recession is the current strength of the labour market. Unemployment declined to historically low levels in many places, and job vacancies reached record highs in certain quarters. While layoffs, hiring slowdowns and natural attrition are likely, those conditions make a large spike in unemployment less probable than in past downturns.
What’s driving the likelihood of another recession?
During the pandemic, many governments enacted sizable relief programs and central banks cut rates to historic lows. In Canada, pandemic-related federal support and near-zero borrowing costs led households to build large savings buffers. At the same time, housing markets and stock prices climbed, while supply chain disruptions and geopolitical events reduced the availability of goods such as cars, electronics, oil and agricultural products.
The combination of increased money in the system and constrained supply contributed to a sharp rise in inflation. To counter that, central banks have moved to tighten monetary policy, raising rates quickly to reduce demand and bring prices back toward target levels.
What role has the BoC played?
The Bank of Canada (BoC) has shifted from a low-rate stance to aggressive rate hikes in order to restore price stability. Initially, some policymakers characterized inflation as transitory. But when inflation accelerated and remained well above the 2% target, the BoC pivoted and implemented a series of rapid rate increases.
Higher interest rates are intended to cool spending, borrowing and investment, and to slow labour demand. The early impacts of those moves are visible: households and businesses have curtailed spending, housing markets have decelerated and stock prices have softened. The BoC has signaled it is willing to tolerate slower wage growth and a potential recession to bring inflation back under control.
Recessions aren’t all bad
Recessions are a normal feature of the business cycle. While disruptive, they are not always catastrophic. Market downturns and short recessions can create opportunities for long-term investors and often precede recoveries. History shows that staying calm and maintaining a long-term perspective typically serves investors better than trying to time the market.
Even when indicators point toward a recession, the exact timing and severity are uncertain. Preparing sensibly is more effective than reacting in panic.
How can you prepare for a recession?
Preparing for an economic downturn means following a few defensive financial principles: build a cash reserve, diversify investments and keep your skills and resume up to date. Ask whether your industry is vulnerable, whether your skills will remain in demand, and whether you could replace lost income if necessary.
Practical strategies include:
Build an emergency fund
Save three to six months of essential living expenses in liquid accounts. Relying solely on lines of credit can be risky if credit conditions tighten during a downturn.
Make sure you have a diversified portfolio
Hold a mix of assets—stocks, bonds, real estate and other categories—spread across sectors and geographies. Large-cap, established companies in defensive industries tend to be more resilient than smaller, speculative firms.
Don’t try to time the market
Long-term, low-cost investing generally outperforms frequent market-timing attempts. Consider regular contributions to a broad-market index fund and focus on companies you believe will endure for decades.
Update your skills and your resume
Assess your career resilience, pursue training if needed and keep your resume current so you can respond quickly to job market changes.
Keep living your life
Recessions are temporary phases. Maintaining a sound financial plan, staying informed and avoiding panic-driven decisions are the best ways to navigate a downturn. If a recession arrives, remember it is a valley to cross, not the end of the road.
Read more about planning for recessions:
- What the Bank of Canada’s latest overnight rate hike means for your finances
- Are ETFs a good investment for an all-weather portfolio?
- How might inflation impact your retirement plans?
- Is now the time for retirees to sell stocks and buy GICs?