A recession could be coming to Canada in the next 12 months or maybe sooner, according to economists. The increasing interest rates are tightening the money supply, and the Russia-Ukraine war is increasing food and oil costs. The pricing pressure has started to affect consumer demand. Canada, which outperformed its global peers due to its oil sands reserves, is now feeling the pinch of a slowdown. Statistics Canada’s flash estimate of GDP contracted 0.2% in May, as home sales fell 9%, and oil and gas output reduced due to regular maintenance shutdowns.
It’s time to prepare for a recession in Canada
Some economists fear that a recession in Canada could come as early as the end of 2022. If a recession hits Canada, it could be a severe one. Why?
The energy and mining industries are driving Canada’s current GDP growth. If the global economy falls into a recession, it could reduce inflation from rising energy and commodity prices. Canada’s GDP could contract way more than the United States because of its high exposure to energy and mining. Moreover, rising mortgage rates could burst the country’s housing bubble.
A recession brings financial hardships for an average Canadian household, as the cost of living rises and borrowing becomes expensive. Those with working income delay their spending. Retiring in a recession could be difficult, as your equity portfolio might not look rosy, and daily expenses keep rising. Not having an income source could be scary, as you may exhaust all your savings before you know it.
Two ways to retire in a recession
Every crisis brings an opportunity for creative solutions. If your retirement is due next year, you might consider the below options.
Make debt repayments your priority
The growing interest rate will make the debt more costly. Interest saved is interest earned. If you have any pending debt, accelerate its repayment before it spirals into bad debt. Default rates spiral during a recession. You may not want to be burdened by high-interest payments when you don’t have a working income.
Many Canadians paid off a significant portion of their debt during the pandemic, as interest rates fell to near zero. Talk to an expert and identify ways to retire debt free.
Rebalance your portfolio
It is time to rebalance your Tax-Free Savings Account (TFSA) portfolio, as the market is still skewed towards energy stocks. Canadian energy stocks are trading closer to their 52-week highs. A recession could reduce inflation and oil prices if the oil supply eases. Now is a good time to cash out some energy stocks and reinvest in REITs, as the bear market has pulled down stock prices of many strong companies. You can lock in a high yield for the rest of your retirement.
SmartCentres REIT (TSX: SRU.UN) and True North Commercial REIT (TSX: TNT.UN) have distribution yields of 6.7% and 9.5%, respectively. Both the REITs survived the pandemic without distribution cuts. They can deliver similar performance in the upcoming recession. What makes me optimistic?
SmartCentres earns 25% of rental income from Walmart, and True North gets 35% from government tenants. Recession or no recession, Walmart and government offices will keep running, which means the rental income of the above REITs is secure. They can continue paying stable distributions every month. You can use the distribution yield to aid your daily expenses.
A $20,000 investment in each of the two stocks could earn you $270/month that you can withdraw tax free from a TFSA. When the economy recovers, your $40,000 could appreciate to $47,000.
