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Thursday, May 26, 2022

Investment Banking Giant Sounds a Major Recession Warning. Should You Prepare?

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Is the economy about to take a major turn for the worse?


Key points

  • Deutsche Bank is concerned that a major recession is imminent.
  • You can take steps to prepare for one, like taking care of your emergency fund.

The U.S. economy has come a long way since the start of the COVID-19 pandemic. Back in April 2020, the national unemployment rate reached a record high. Now, the jobless rate is comparable to where it sat before the pandemic began.

But things may not stay rosy for long. Recently, investment banking giant Deutsche Bank sounded a warning that a major economic downturn could be imminent. And that’s something it pays to gear up for.

What happens during a recession?

A recession is generally defined as a period of notable economic decline. But that can manifest in different ways.

Often, unemployment rates will rise during a recession as companies cut costs by laying off staff. Sometimes, rising jobless rates will be accompanied by a stock market crash or even a housing market decline — but that won’t always happen. It’s possible to have a scenario where joblessness is high, but stock and property values hold steady.

Why is a near-term recession a concern?

Deutsche Bank cites plans on the part of the Federal Reserve to rapidly hike up interest rates as a potential recession trigger. Right now, inflation is soaring, and raising rates is one solution for tempering it. But if the Fed acts too aggressively, it could end up hurting the economy rather than helping it.

How to prepare for a recession

To be clear, just because one investment bank has warned of a near-term recession doesn’t mean we’re guaranteed to have one. But it’s always a good idea to prepare for any sort of extended economic downturn, and there are several steps you can take.

First and most importantly, shore up your emergency fund. If you don’t have enough money in your savings account to cover three to six months of essential living expenses, start cutting back on unnecessary spending to beef up your cash reserves. Because job loss is common during recessions, you’ll want a means of paying your bills if you were to get laid off through no fault of your own.

Next, do your best to whittle down high-interest debt. If you end up losing your job or seeing your hours cut as economic conditions decline, you won’t want those costly payments hanging over your head. Plus, the sooner you pay down expensive debt, the less money you lose to interest.

Finally, do what you can to secure your job. Sometimes, when economic conditions sour, job loss can happen even if you’re the most dedicated employee your company has ever hired. But if you make a point to grow some of your job skills, your company may have a harder time letting you go even if the economy slumps and its revenue declines significantly.

Don’t panic

Getting worked up over the idea of a recession isn’t really a good use of your time — especially since we can’t say with certainty that’s where the economy is headed. A better bet is to actively prepare for that possibility so you’re covered no matter what turn the economy takes.

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