JJ van Wyk, Executive Financial Adviser at Momentum Financial Planning

‘Recession’. This loaded term gets thrown around a lot and hangs over our heads like a malign portent of economic doom. As much as we all know that a recession is inherently negative, does the average South African household grasp what it truly means to live in and prepare for an economic recession?

While South Africa is not currently in a recession, Executive Financial Adviser JJ van Wyk from Momentum Financial Planning says the possibility remains a topic of discussion, particularly in light of recent economic challenges.

“If you don’t understand what it is, how can you plan a way forward,” remarks van Wyk. “With the right knowledge and advice, it is completely possible to stand firm in the face of recession and safeguard your household’s financial wellbeing.”

What is a recession?

According to van Wyk, a recession is defined as a significant decline in economic activity that lasts for months or even years. It typically involves negative gross domestic product (GDP) growth, rising unemployment, falling retail sales, and decreased income and manufacturing output over an extended period.

Contrary to what many households fear, van Wyk says recessions are considered a natural part of the business cycle and include phases of economic expansion and contraction.

A cautious outlook

Although South Africa appears to have avoided slipping into a recession in the second quarter of 2024, the economic landscape still remains uncertain. “We face challenges like declining GDP per capita and rising interest rates, which ultimately put strain on household finances. In this environment, our households should up their financial game,” says van Wyk.

The latest Momentum Unisa Household Financial Wellness Index further reveals that a significant portion of South African households overestimate their financial knowledge, putting them at risk of making poor financial decisions. With 90.6% of households unable to perform basic financial calculations, the need for increased financial literacy is evident.

The effects of a recession on households

During a recession, van Wyk says households often face a range of financial challenges. “One of the first noticeable effects is reduced consumer spending, as people become more cautious with their money in the face of economic uncertainty. This decline in spending can further weaken the economy, creating a cycle of reduced consumption and economic contraction,” says van Wyk.

In addition, rising interest rates make borrowing more expensive, leading to higher costs for servicing debt. van Wyk says this is particularly concerning for South African households, which was highlighted by the latest Momentum Unisa Household Financial Wellness Index.

Preparing financially for a recession

Given the potential impacts of a recession, van Wyk says it’s important for households to take proactive steps to prepare financially. With a recession never truly off the table in these times, van Wyk provides some strategies to consider:

• Build an emergency fund: Establishing a financial safety net is crucial. Aim to save at least three to six months’ worth of living expenses in an easily accessible account.

• Reduce debt: Paying down high-interest debt can free up resources and reduce financial stress during tough economic times.

• Stick to a budget: Creating and adhering to a budget helps ensure that your spending aligns with your financial priorities, reducing the risk of overspending.

• Increase financial literacy: The Momentum Unisa report underscores the importance of financial literacy. Despite 45.7% of households believing they are financially literate, only 15% actually are. Improving your understanding of basic financial concepts—such as interest rates, inflation, and investment risks—can empower you to make informed decisions.

• Diversify income sources: If possible, explore additional income streams, such as side businesses or freelance work, to supplement your primary income.

• Invest wisely: During uncertain times, it’s essential to evaluate your investment portfolio carefully. Avoid making emotional decisions and seek advice from financial advisers to ensure your investments align with your long-term goals.

While the future is uncertain, being financially prepared can help households navigate the potential challenges of a future recession. “By taking proactive steps now, you can protect your financial wellbeing and weather the potential storm, should economic conditions worsen. Remember, there is no substitute for the right advice, so connect with a financial adviser to get a more personalised view of what a recession might mean for your household and how you can prepare,” van Wyk concludes.

ENDS