From dinner tables to boardrooms, the same uneasy topic keeps surfacing: recession. With growth slowing, unemployment rising, and confidence faltering under the weight of an ongoing trade war, Canadians are asking the same question: are we already in one? By definition, economists say a recession requires two consecutive quarters of economic decline. And while the country hasn’t yet crossed that threshold, the warning lights are flashing yellow.
Still, uncertainty doesn’t have to mean panic. To help Canadians face potential economic challenges with greater confidence, Kun Huo, Ivey Assistant Professor of Managerial Accounting and Control, joins Impact’s Ask the Experts to share practical strategies for strengthening financial resilience.
1. Recessions expose what balance sheets really look like – for companies and for households. What warning signs should people look for in their own “personal balance sheets”?
First of all, if you already plan your personal finances around the concept of a balance sheet, you are off to a good start. I would love to know what percentage of Canadian households operate on a “balance sheet basis,” in which you keep track of your total assets and total liabilities vs. a “budget basis,” in which you manage the cash inflows and outflows in your bank account – the proverbial “making the ends meet”. I suspect that the balance sheet approach is in the minority.
To be clear: making ends meet is essential, but it’s not enough to prepare for economic turbulence. A core principle of any balance sheet is separating current (liquid) assets from non-current (less liquid) ones and doing the same for liabilities due within a year. For example, any credit card balances, buy-now-pay-later, and children’s tuition for the next semester are all considered current liabilities. Companies try to remain liquid by maintaining a current ratio (current assets / current liabilities) of at least one; households should strive for the same. Becoming illiquid can force good businesses into bankruptcy, and for households, illiquidity can have devastating consequences on future retirement plans.
2. What are the most prudent financial strategies Canadians should consider today to safeguard against a potential recessionary shock?
As Warren Buffett likes to say, it is only when the tide recedes that we learn who has been swimming naked. But Canadians don’t have to wait for the tide to turn – there are ways to prepare now.
To further develop the idea of the personal balance sheet, it is essential to consider one’s total assets, including liquid assets (e.g., cash, stocks, bonds), illiquid assets (e.g., vehicles, homes, and Pokémon card collections), and locked assets (e.g., pensions and RRSPs). Additionally, one should adopt a conservative approach to forecasting which cash flows can be relied upon during recessions. Remember, debt payments (e.g., car loans, student loans, and mortgages) are fixed, while the quoted prices of one’s assets can fluctuate. Thus, a financial cushion is necessary to make obligatory debt payments, ensuring that one is not forced to sell valuable assets at depressed prices.
3. In a downturn, how should individuals think about priorities – reducing debt, building liquidity, or staying the course with long-term investments?
The potential loss of income is often the biggest worry during an economic downturn. Yet in Canada’s last major recession, from 2008 to 2010, unemployment peaked at 8.4 per cent. In a healthy economy, it typically sits around 5 per cent – meaning most people remained employed and financially stable.
For many individuals and families, the greater risk lies in the psychological shock of falling asset prices – in both homes and investment portfolios. During the global financial crisis, many panicked and sold too soon, leaving themselves far less wealthy than if they had stayed invested. Since then, real estate values have climbed sharply, and even an investor who bought the S&P 500 at its 2007 peak would have more than quadrupled their money by 2025, if they’d held firm. Thus, it is essential to take a step back and stay the course with long-term investments.
4. Looking back at past recessions, what practical lessons stand out that could guide better decision-making today?
Mark Twain once said that history doesn’t repeat itself, but it often rhymes. From the bursting of the Dot Com bubble to the Great Financial Crisis to COVID-19, every recession has had its own set of economic drivers and warning signs. But time and again, people repeat the same mistake – selling at the worst possible moment instead of buying when prices are low. In each case, maintaining sufficient liquidity, avoiding panic selling, and remaining optimistic would have been an effective strategy.
Past recessions have also shown that central banks respond decisively, cutting rates to counter weakness or raising them to curb inflation. Having liquidity makes it possible to benefit in either scenario: renegotiate debt when rates fall and keep cash ready to earn interest income when they rise.
Alternatively, if income loss isn’t a concern, investing the cash in the stock market during a crash in a mechanical fashion (close your eyes and hit “buy” every month) can accelerate your retirement goals. I come back to my original advice: assess your finances early and often, adjust before the downturn, and execute your plan calmly when others panic.
5. What’s the single most underrated lesson Accounting can teach us about resilience?
Unlike personal resilience, economic resilience can be measured, and it is essential to know your level in both good times and bad. If you are concerned or confused about your financial situation, it doesn’t hurt to contact an accountant – or at least that person in your extended family with an accounting degree. Scotiabank’s slogan says, “You’re richer than you think.” It’s a catchy, reassuring line – but I can’t promise your accountant would agree. You might be more financially resilient than you realize, or less. Either way, it’s better to know than to guess.
Kun Huo is an Assistant Professor of Managerial Accounting and Control at the Ivey Business School. His research explores how accounting information and performance measurement systems influence employee motivation and performance in complex, judgment-based, and creative tasks. He also examines how pay transparency and pay discrepancies shape managerial decision-making, employee cooperation, and overall workplace motivation.
