Here we are, heading into a recession. What does this actually mean though?
While there is no official definition, technically a Recession is 2 negative economic growth periods in a row. A growth period is measured in quarters (3 months).
Big deal, what does it mean for you?
During a recession, the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines. The point where the economy officially falls into a recession depends on a variety of factors.
What are the things you can do to prepare yourself for the coming recession:
1. Clear any of your consumer debt, or refinance it to a cheaper rate. You need to be sure that your repayments will be affordable as other prices increase (such as petrol and food).
2. If possible build your reserve fund (we mean your savings) so that you are able to cope with any unexpected costs, or ensure you have a facility you can draw on in emergencies.
3. Check that your lending is affordable today and also if the interest rates increase – talk to your Financial Adviser to make sure that the loan structure and lending is going to be affordable going forward.
4. Reach out! Suggestions of cutting your spending or increasing your income for many is not an option as they are already working multiple jobs just to pay the rent and to put food on the table. For these people working with budgeting services and accessing relief services is going to be key for survival. Our suggestion is if you are struggling to put food on your table please don’t be too proud to reach out for support.
5. Don’t panic. It may be hard going for a while, but recessions don’t last forever.
There are different types of recessions, with different levels of impact for us all. Currently most economists are hoping for a soft landing and to get through this recession quickly. This is partly why the banks are increasing the interest rates quickly as part of their efforts to bring inflation under control. How does that work? Well… Higher interest costs reduce demand by forcing consumer and business borrowers to spend their cash flow on servicing debt, and for other goods and services, therefore reducing inflationary pressures on those goods and services. Thanks FinanceNZ for that.
A bit of context about this recession
In the Global Financial Crisis recession of 2008, we had the added factor that some banks and lending institutions failed. Since the GFC the Reserve Bank has put in place addition controls and requirements on banks and lenders to ensure that they are able to manage in a recession and that this time banks do not fail. One of the controls was that the banks were required to hold more capital, which means they need people to have savings at the bank in the form of investments and term deposits.
In terms of the current recession, the banks are in a more stable position than they were back in 2008, but it also means that we can expect see banks pulling back from high LVR lending. ANZ , Westpac and ASB have already limited their lending over 80% and applications are being reviewed on a case by case basis. This time around the banks are going to be able to support existing customers better if funding tightens.
At the present time we have high employment in New Zealand and the “brain drain” is just beginning, as people who have postponed leaving NZ for 3 years head overseas on their OE or for job opportunities. Why are we mentioning this? Well it means that with unemployment rates potentially rising, the number of people leaving NZ will even this out a bit. Employees are in a good position with plenty of jobs to choose from. Employers are experiencing difficulties recruiting in many areas.
We will keep updating as we navigate our way through this recession, and do please reach out if you’re stressed or just curious about how all this will impact you in the coming months.
Get in touch with us and we can chat about your best options for paying off your mortgage, buying your first home, or managing your debts.