What are economic fluctuations, and how to prepare for them?

Like everything else in life, economies also experience ups and downs. And for better or worse, when they do, we feel them too. Economists label the ups as “economic growths” and the downs as “economic contractions.”  

If a country’s economic activity declines for 6 months straight, it’s going through what’s known as a recession.

Generally, experts can tell whether an economy is growing or contracting by its gross domestic product (GDP).

What’s GDP? It’s the total value of all final goods produced and services provided within a given country that are bought by the final consumer. 

And although an increase in GDP would indicate economic growth, some experts believe it isn’t enough to show the overall health of an economy. Because, for example, GDP doesn’t capture how income is distributed in a country or take into account the value of labour that isn’t paid for, such as volunteer work. 

That’s why some organisations tasked with determining if a recession will begin in particular countries study other indicators, like levels of unemployment and personal income. 

Now, what causes a recession? 

Here’s the thing. Identifying what can cause a recession is challenging because not all recessions begin for the same reasons. Domestic factors (such as rising interest rates) are sometimes at play. Other times, external ones (such as wars) are. And more often than not, it’s a mix of both!

To demonstrate this point, consider the following:

Between 2020 and 2021, there was a significant increase in car prices in the USA because of a shortage of the computer chips needed to manufacture them. To allow the supply to catch up with the demand, the Federal Reserve - think of this as the American equivalent of the Central Bank of Jordan - raised interest rates, so that consumers would avoid borrowing money to buy cars. 

Was this measure enough? Unfortunately not. 

Remember how we said external factors can also lead to or contribute to a recession? 

This is where Russia and Ukraine come in.    

Both countries export essential commodities, such as wheat and crude oil (which is used to produce gasoline and diesel fuel). So, when the Russia-Ukraine war started in 2022, the supply of these commodities and others was disrupted, causing prices to increase across different sectors and industries.  

Of course, before this, the entire world was confronted with the COVID-19 pandemic, a time of lockdowns and movement restrictions, which caused individuals and businesses to feel uncertain about the future. And, as a result, they avoided spending money and delayed investing to stay afloat, reducing economic growth.

And although there can be many causes of a recession, what’s important is to think about how to protect yourself and your finances. 

Here’s how to prepare yourself in case of a recession:

1. Create a budget

Creating a budget will allow you to identify which expenses are necessities and which aren’t, so that you can allocate your income more appropriately to better withstand a recession.

2. Build an emergency fund

Not to sound gloomy, but recessions are known to be times of high unemployment and pay cuts, among other not-so-pleasant features. That’s why having an emergency fund is essential, because it will provide you with a buffer of cash to fall back on without going into debt if, for example, you need to cover the cost of a medical emergency or repair your car.

3. Pay down debts

Experts recommend prioritising paying down debts, as this will allow you to free up cash for an emergency fund. And they generally agree it’s best to tackle high-interest debt, like credit card debt, first. 

We know that paying your credit balance in full may be difficult. But we recommend you try your best because interest adds up. And when new charges are added to your card, that only increases the debt you owe.

If you can’t pay the entire balance, at least pay the minimum amount required on time to avoid late fees. Also, try to limit your spending to what you can afford to pay off each month. 

4. Consider learning opportunities

Whether you’re a university student or a fresh graduate looking to earn a living, finding a job in ordinary times isn’t the easiest. That’s why we highly recommend you consider pursuing training opportunities and expanding your skill set in ways that would enhance your CV. This will help you better position yourself to employers during recessions, when firms will want to be certain of the value of each new recruit.  

5. Find ways to make extra money

We know that living from paycheck to paycheck isn’t exactly delightful. That’s why it’s not a bad idea to find a side hustle. 

Working freelance, making money out of your hobby, and doing odd jobs are ways to increase your monthly earnings.

We hope that after reading this article, you've gained a better understanding of what a recession is and learned some tips to protect yourself and your finances in the event a recession happens.