How To Prepare For A Coronavirus-Sparked Recession

How To Prepare For A Coronavirus-Sparked Recession

Malaysians have been complaining about high costs of living, sluggish wage growth and unaffordable housing for years. While we haven’t experienced a recession since 2010, many people probably thought that we were in one for years, or that we were heading for one soon.

A month ago, we ran a Facebook poll to ask our readers if they thought we were in a recession. Out of 200 respondents, 77% said that we are definitely in a recession, while 23% said that we’re not in a recession (yet). But thanks to the coronavirus outbreak, plunging oil prices and the Movement Control Order, we’re guessing that a lot more readers are now expecting a recession.

So, is a recession coming, and if so, how can we prepare for one?

What is a recession?

First off, you’ll need to know what a gross domestic product (GDP) is. A GDP measures a country’s output, which includes everything produced by the people and businesses within the country.

GDP = the total value of all goods and services a country produces

The GDP helps economists tell if a country’s economy is healthy or not. Many analysts define a recession as a period of economic decline, in which a country’s real (inflation-adjusted) GDP falls for two consecutive quarters.

Recession = fall in GDP for two consecutive quarters

The National Bureau of Economic Research (NBER), a private non-profit in America, uses a broader definition. It defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.

People fear recessions because it could mean lower incomes, and many workers could lose their jobs.

So, is Malaysia in a recession?

Malaysia’s GDP grew 4.4% in the 2019 Q3, and 3.6% in 2019 Q4. Earlier this year, our former finance minister said that there is no risk of a recession in Malaysia.

But things have changed drastically in the past month. Thanks to the coronavirus outbreak, economists are saying that a global recession is likely. Some also point out that it’s already beginning. Back home, economists also expect the coronavirus to send Malaysia into a recession. Malaysia’s GDP growth is only expected to be between -2% and 0.5% in 2020.

In short, Malaysia will likely enter a recession.

Health crisis and economic downturn: why this coming recession is unique

According to Yap Ming Hui – the founder and managing director of Whitman Independent Advisors Sdn Bhd, a licensed independent financial advisory firm – the feared recession will be unique.

He points out that past recessions were purely financial.

1980sCommodity shock – drop in the prices of oil, palm oil and rubber.
1997/1998Asian Financial Crisis – international currency speculation led to currency and stock market declines throughout Asia.
2008Global Financial Crisis – when the real estate bubble burst in the US, it badly affected the American economy and rapidly spread to other countries. Malaysia’s exports and commodity prices fell thanks to lower global demand.

This time, however, this recession will be sparked by the coronavirus. The Business Insider points out that past recessions were driven by weak consumer spending, which led to lower business revenues and job cuts.

But this recession is arriving on both ‘supply’ and ‘demand’ fronts. On the demand side, there is less economic activity because people are going out less and consuming less. On the supply side, fewer businesses and factories are operating. To fight recessions, governments typically implement measures to boost consumer spending – but it’s hard for consumers to spend more money when stores are closed and factories aren’t producing goods.

And then there’s the health risks. The coronavirus is contagious. To curb the virus, governments have to implement social distancing measures and movement controls. But when we tell people to stop going to work, or stop going to restaurants and malls and so on, we’re restricting businesses and consumer spending from returning back to normal.

In other words, to slow the pandemic, we have to sacrifice economic growth. Some economists think that we may not see a recovery until the public health crisis is resolved.

What can you do to prepare?

While we may not be able to avoid a recession, we can be prepared for it. Yap shared a few things that Malaysians can do that covers both the financial and physical hazards:

1. Emergency savings

Yap suggests having six months’ worth of living expenses if you are an employee, one year if you are self-employed and three years if you are a retiree. An emergency fund helps you cover unexpected costs – for example, if your refrigerator suddenly breaks down or if you lose your income. This is more important than ever during a recession, because it helps you through times when cashflow might be tight.

It’s also necessary to have emergency savings before you invest, cautions Yap. If you invest all your money, you might run into a situation where you’ll need money urgently, and resort to selling off your investments at a loss.

2. Get insured

Everyone should get medical insurance, especially when there’s a pandemic and economic recession around the corner. During a recession, your cashflow might be tight, and your assets could be tied to the market. Having adequate medical coverage will help cover your medical costs, so you can preserve your cashflow and avoid dipping into your savings.

In addition, Yap suggests doing a capital needs analysis. This means figuring out the amount of money that your family needs to maintain living standards in the event of your death.

For example, your and your spouse are both 35 years old. You have a 10-year-old son. You expect your son to graduate and be financially independent by 25 years old, which is 15 years later. So you’ll have to calculate how much money your family will need to cover 15 years of living expenses, including the cost of your child’s education.

Let’s say you’ll need RM1 million. Now, you need to review all your assets. This could include your investments, your properties, your Employees’ Provident Fund (EPF) savings and your insurance coverage.

How much are all your assets worth, and how far do you fall short of your RM1 million target? If you only have RM600,000 worth of assets, you’ll have a RM400,000 gap. You could close this gap with insurance coverage. A life insurance payout could help your family afford living expenses and other large costs if something happens to you.

3. Put together a will

You’ve spent years building up your assets. Now, you’ll want to make sure it will be fairly distributed, and that your family will have access to them should anything happen to you. You can do this by putting together a will.

In your will, you’ll need to appoint a trustee who can manage your assets on your behalf. You may also need to appoint a guardian to care for your children. This protects both the financial and physical needs of your children.

4. Review your portfolio and keep invested

Review your investment portfolio. Whether it’s unit trust funds, stocks or properties, “get rid of those poor-quality investments and keep those quality investments,” said Yap. The cash that you raise can be used to buy quality investments during this time while prices are low.

For cautious investors, Yap suggests using the dollar-cost-averaging (DCA) method into unit trust funds. This allows you to spread your money across many different sectors, instead of individual shares. And by investing a specific amount of money at a fixed schedule, you avoid emotions like greed and fear during these volatile times. It also allows you to invest in more units as prices drop, allowing you to take advantage of the market downturn.

Savvier investors can try a market down averaging strategy. Every time the market drops by a certain percentage, you’ll invest a corresponding amount. “By buying at every new low, you are quite certain to catch the bottom,” said Yap.

This too shall pass

Recessions are part of the economic cycle. Even if the coronavirus pandemic didn’t happen, we would experience a recession due to something or other anyway. And while current events are worrying, it’s good to remember that recessions don’t last forever. In the meantime, we can do our best to prepare for what’s about to come, and hopefully emerge stronger and wiser.

Read more

COVID-19 Recession: Should You Invest Now?

COVID-19: What Does A Recession Mean For You And Me?

What Is In The 2020 Economic Stimulus Package?

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