While you were busy wiping jollof rice oil from your mouth during the holidays, you may have missed the predictions of a global recession looming in 2023. We have been here before in 2008 when Obama was in office so panic not. It took the world 5 years to get back to the levels before that “Great Recession” but lessons were learnt. A recession is a slowing down of economic activity. It typically comes with a slowing down of consumer demand for non-essential goods and services, an unwillingness by banks to give cheap loans to private businesses, and the consequent overall effect of these businesses protecting their finances by downsizing the work force. In many economies the government increases spending and liquidity to shore up the economy since private businesses struggle with demand, cash flow and access to loans.
As you know this blog is a common man’s perspective on goings-on so let me simplify it for you. As a small business owner, you may find out that many of your customers have lost their jobs and so they cannot buy the quantity of goods they used to buy from you before. This means that you too must reduce the amount of payout you make from your business in form of expenses. You might have to write off some raw materials and cannot pay salary for all the people you have employed so you need to sack them too. That’s the ripple effect on businesses. Considering that you can also not get a loan as usual since the banks reduce their risk exposure by not giving loans, then what?
On a personal level, if you are living with your parents and only your older sibling has a good job that takes care of the family, what happens if the recession costs him his own job too? Even if you are on your own but an employee of a business, what happens if the business is impacted by the recession? Will your bills suddenly stop or will you be stranded since all the sources of cheap loans have also closed shop? This is why it is important to listen to economic predictions and act on them.
Here’s what to immediately start to do as a common man:
- Do not take financial risks at this time. There is an increased risk of business failure (due to low demand), bankruptcy and default in loan repayment. Essentially, avoid taking on new debt to fund your business or keep operations running because you love your employees and don’t want them to suffer. Also do not sign as a loan guarantor for anybody at this time. They are very likely to default due to recession factors and you will be stuck with the loan.
- This is not the time to quit your job. As a result of the recession, many companies are already facing financial strain and usually reduce their workforce and freeze any recruitment at that time. If you leave your job, be prepared to search for a longer period before you find a new one especially in non-essential roles.
- Be careful of banks offering you low flexible interest rate loans especially for long term mortgages. The truth is that the loan demand is very low during a recession and that drives down interest rates but because it is flexible, as soon as the economy starts to recover these rates will go up and you will be stuck with it in the longer life of the loan.
- If you have a salary, increase the amount that you save from it. Having an emergency fund will insulate you from sudden emergencies that you usually would have solved from a salary or a quick loan. Always brace yourself for a job loss and use that to drive your financial decisions at this time. If you can get a discount for paying in advance of family necessities like school fees, rent and insurance, then try to pay ahead and release your future inflow for real time needs.
- Also, try to get multiple streams of income, especially in cash based essentials like food selling, medical and pharmacy, real estate and discount stores. The concept is that in a recession, people prioritise their spending to focus on absolutely necessary things like food, education, shelter and medicine. If you play in those sectors your business will remain relevant.
- Above all, live below your means (not even within it). An economic downturn is called a DOWN TURN for a reason, even things you can afford now because of your existing pay bracket might become difficult to maintain in the event of a job loss. A super expensive luxury car demanding quarterly expensive maintenance may put you out of pocket in a recession. If you are a couple both earning salary, try to see if you can survive on one spouses salary alone and save the rest (also good practice in case one of you loses their job).
If you look at the tips above, you will not find panic as a strategy anywhere. When you panic, you are likely to make knee-jerk decisions that are not well thought out. So whatever your situation do not panic. If you do not currently have savings, do not panic. If you cannot find a new source of income in time, do not panic. Make plans, ask around, connect with people already doing it (like the hairdresser or groceries seller in your area) and use that energy to take action instead. It will also pass eventually, and God-willing you will be just fine.
Happy to receive other tips and keep the conversation going, either here or on Twitter @roqzee. Best of luck!