Reflections surrounding a potential recession have started to circulate in the media. Here are a few suggested approaches you can take when discussing with and trying to help any clients who have concerns.
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Are we going into a recession?
Different scenarios were possible at the time this article was written: It’s still too soon to tell! But it is always time to talk about it and explore the potential impacts on your clients’ finances.
What is a recession and how does it impact the economy?
A recession occurs when a decline in economic activity leads to a fall in GDP for several months. Even though recessions may differ, they generally lead to reduction in consumption and investment as well as job losses.
What sparks a recession?
Many factors can contribute. For example, the recessions at the beginning of the 1980s and 1990s were caused by the interest rate hikes implemented to contain inflation, which had led to economic slowdowns. Other factors may include:
- A major and sustainable shock to the price of raw materials
- Bursting of the financial bubble
- Corporate over-indebtedness
- Loss of confidence in the economy
- Wars, pandemics, etc.
If a recession should occur in the current environment, the pandemic, the war in Ukraine and the supply problems which have fed inflation would be among the main causes of the slowdown. The fact that interest rates were very low for years and the level of household debt also contribute to the current situation.
How would your clients be impacted?
The impacts can vary according to each of your clients’ specific financial situation. Market volatility could continue to affect their savings based on the level of risk of their investments and their portfolio diversification.
On a more personal level, some of your clients may have to review their budget to adjust their expenses. Job losses could also occur, but in the current labour shortage environment, the losses are less likely to happen as in past recessions. As Sébastien Mc Mahon explained in his latest economic overview, “Canada’s labour market is doing very well.”
Additionally, even though interest rates have increased, they remain historically low, which has the effect of sustaining the economy.
We have also seen that a change of economic situation could push some people to cancel an insurance contract or put their systematic savings on hold. This is not recommended, as we explain below.
Can a recession have positive effects?
A recession is hard while it lasts, but it is often compared to “a necessary evil” which opens the door to new opportunities. Some businesses readjust or reinvent themselves; others close their doors to leave room for new business initiatives.
People who invest in the markets long-term can also draw benefits when the economy recovers, especially if they have the proper guidance and take advantage of the opportunities that arise. Fixed amount periodic investments are a great way to benefit from these purchase opportunities made possible by recessions.
Historical data show that following an established plan and staying invested for the longer term is always the preferred strategy.
What can you do with your clients?
As a financial security advisor, your presence among your clients plays a key role at all times, including when the economy is less encouraging. Here is how you can guide them:
- To start with, encourage them to remain invested and maintain their established savings plan.
- Talk to them about the risks of selling at a loss when markets are down and tell them about the purchase opportunities which can arise.
- Encourage them to invest through periodic purchases to follow the market and be in a position to benefit from future opportunities.
- Remind them of the importance of having a diversified portfolio.
- Encourage them to set up an emergency fund if they don’t have one already.
- Help them review their budget, as needed.
Got any other suggestions on how to best support your clients? Share them with us in the comments section!
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