How To Prepare For A Recession As A Working Adult In Singapore?

Prompt stimulus measures were effective in mitigating economic downturn during the COVID-19 pandemic onset in 2020. However, some economists warn that we might not be so lucky in the near future.

For the mature working population, economic crises like recessions aren’t surprising. In fact, Singapore has undergone several since the last millennium. But for the younger to middle-aged adults in the workforce — like Millennials and Gen Zs — the thought of a recession is enough to send anyone into a flurry. 

After all, living through a recession as a kid is different from living through one as an employed adult.

With the recent 3.3% core inflation high, soaring petrol prices, shrinkflation, and more, the global economy is on heightened alert. A dark, foreboding cloud of an economic recession seems to be looming overhead.

This grim narrative is bolstered by Prime Minister Lee Hsien Loong’s concerns over the current high inflation trajectories “provoking a recession” in the next two years. This worry comes after the US Federal Reserve tightened its monetary policy by instigating the biggest rate hike since 2000 by 0.5% to curb inflation.

But what does this mean? Is a potential major recession on the horizon a cause for panic? 

No, not necessarily — especially if you’re equipped with the right tools and knowledge. 

Table of contents

• What is a recession?
• Is a recession imminent?
• How to manage a recession?
  • Financial self-reflection
  • Savings account
  • Investments
  • Debt/loan repayment
  • Real estate/housing
• How will a global recession affect Singapore?

What you should know about a recession in Singapore 2022

What is a recession?

A recession occurs when there’s a persistent and significant economic decline spread over a few months. 

For a better understanding, economic growth is measured by gross domestic product (GDP). In economic terms, GDP consists of consumption (C), government expenditure (G), private investments (I), and net exports (X-M) where imports (M) are subtracted from exports (X).

GDP = C + G + I + (X - M)

In essence, GDP refers to the total monetary value of all goods and services produced in a country within a period. Hence, it measures a country’s total national output in a given period.

Therefore, a decrease in any of the GDP indicators — other than imports — will result in slower GDP growth or worse, a negative GDP value altogether.

Nonetheless, it’ll take a significant length of time for GDP to be in the red before a recession is announced. The textbook period for negative GDP to classify as a recession is two consecutive quarters/six months.

Is a recession really underway?

Although prices of goods and services are on the rise, this has been met with a corresponding pent-up demand and “revenge spending” in consumer expenditure, says CIMB Private Banking economist Song Seng Wun. 

So far, businesses have also been able to pass on rising costs to consumers and continue hiring processes. 

The Ministry of Trade and Industry (MTI) announced that Singapore’s GDP grew by 3.4% in the first quarter, with expectations for it to maintain between “3 to 5%” throughout 2022. This aligns with the International Monetary Fund’s (IMF) 3.6% prediction for global GDP growth.

Citing these statistics, OCBC Bank’s chief economist and head of treasury & research Selena Ling echoed similar sentiments of “an outright recession” being “unlikely at this juncture”. 

Thus, experts aren’t too concerned with Singapore’s present economic situation. Both Mr Song and Ms Ling agree that as long as there is “still enough [business and consumer] confidence”, economic recovery is relatively sustainable.

While that may be true…

Recessions are inevitable. They’re just unpredictable in their time of occurrence and damage caused.

Ignoring the varied extent of potential repercussions, a few things remain consistent — increased unemployment, plummeting stocks and forced closure of businesses are common themes of recessions.

This is why economists are monitoring slowing GDP growth and rising interest rates closely like a hawk. Those are two major indicators of a recession’s tipping point.

Related to this topic:
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5 tips to mitigate a recession on a personal front

While you can’t control the overarching economy, you can control your personal economy. Here are five useful tips to help you prepare before the recession wave hits.

Tip #1: Reassess your finance position

There’s never a bad time to re-evaluate your budget. Managing a recession amidst recovering from a global pandemic won’t be an easy feat. Everyone’s financial situation has taken a blunder in one way or another.

Take stock of your financial standing through the following:

• How much money do you own? 
• How much of it is liquid cash to be easily withdrawn? (e.g. robo-advisors, cash management accounts, CPFIS)
• Any outstanding debt? (e.g. credit card debt, student loans, mortgage, etc.)
• Current monthly living expenses? (e.g. food, utilities, insurance, transport, childcare, etc.)
• Any major life events coming up? (e.g. major operation, wedding, childbirth, college funding, etc.)
• How many (young, elderly or disabled) dependents do you have? 

After considering these crucial questions, you have a clearer picture of whether your needs and wants need to be re-assessed. For instance, re-calculating which fixed expenses can or cannot be compromised is a good starting point.

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Tip #2: Building an effective savings account…

If you haven’t already, budgeting habits like the 50/30/20 rule and its variations are an excellent way to track your spending and accumulate further savings. 

50% goes to necessities, 30% goes to wants, and 20% goes to savings and debt reduction.

The unfortunate caveat here is that saving 20% of your active income may not be sufficient savings in this scenario. Low-interest savings accounts and depreciating assets simply aren’t enough to cut it. 

As a result, many Singaporeans have abandoned those lacklustre interest rates in favour of greener pastures like high-yield savings accounts, fixed deposits, endowment plans and so on. However, the problem with the latter two is that your savings will be locked in for the plan’s tenure, with access to your funds granted at interval payouts at best.

Given the volatility of recessions, cash liquidity is an important determinant for souping up your savings. Hence, it won’t be the wisest thing to devote your entire savings to a rigid fixed deposit or endowment plan now unless they’re relatively short-term (e.g. 1 year).

Instead, high-yield savings accounts, cash management accounts and investing with robo-advisors are the way to go. 

Pro-tip: Remember to dedicate some savings to your emergency fund as well. Automate the fund transfers monthly to remain disciplined in building it.

Related to this topic:
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Tip #3: … And investment profile too

Personal investments have grown incredibly accessible (and popular!) thanks to the proliferation of robo-advisors. Robo-advisors deconstruct the complexities of investing by allowing those with smaller capital or net worth to begin their investment journey. The barriers of entry are further lowered since brokers are no longer required as the middle man.

All in all, robo-advisors provide a wide array of investment possibilities such as single stocks, exchange-traded funds (ETFs), index funds, etc. depending on your risk tolerance and portfolio diversification. Their intuitive algorithm then facilitates maximising returns for your portfolio within acceptable risk levels.

[quote] Thus, instead of trying to beat the market, robo-advisors will match the market. 

Not to mention, their platform fees are relatively more cost-effective than financial advisors. This allows the average Joe to dip their toes in investments without having to be too involved. But of course, robo-advisors have their drawbacks too. 

Pro-tip: Don’t succumb to the “loss-aversion” mindset. Many are quick to sell off their shares during a bear market. Rather, cling on to your assets and wait for the eventual market upturn. 

There are ways to protect your investments during a recession if you stay calm and trust the process.

Side hustles are also a popular form of secondary income. Whether it’s dropshipping, online tutoring, affiliate marketing or whatever, having another income stream is always comforting. It acts as leverage and temporary relief in case of job loss.

Another investment avenue would be a regular savings plan (RSP). Contrary to its name, it’s a monthly investment plan to allocate a fixed sum (from S$100) into securities/financial assets like ETFs, stocks, and unit trusts. It’s another minimal-effort method to grow your investment portfolio.

Pro-tip: Dollar-cost averaging is a relatively better strategy for investments than lump-sum.

That said, never stop expanding — or at least maintaining — your networking list. If you foresee your industry being vulnerable to a recession, these connections will be beneficial in handling the immediate aftermath of retrenchment. 

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Tip #4: Clearing your debt/loan payments 

No one likes being in debt, especially those with pesky-high interest rates. A recession might further increase said rates and make repayment more troublesome. If not resolved promptly, your debt will balloon exponentially and become unmanageable.

Depending on your current financial position, your strategy for handling existing debt can occur in two ways: amp up your debt-clearing or pay the bare minimum.

Choice 1 --- Balance Transfer

The first approach is pretty self-explanatory; we don’t want your debt to prolong any longer than it should. Consider channelling your high-interest debt via a balance transfer to either another credit card (with 0% p.a. promotion) or a deposit account.

But what exactly is a balance transfer?

A balance transfer is a type of unsecured, short-term, 0% – 3% interest loan that redirects your outstanding credit card debt to (1) another credit card or (2) imposes a percentage of your available credit card limit on your deposit account for anywhere between three to 12 months. 

Example: Imagine you have a debt of S$4,000 on a 12-month interest-free balance transfer plan; that means you’d pay a min. S$40 every month until the final full payment of S$3,560 on the 12th month.

Failure to repay the owed sum by the tenure’s conclusion will result in the loan’s interest rate shooting up to 26.9% – 29.9% p.a., which brings you back to square one of the debt problem.

Do note that not all banks offer a promotional/introductory period of six to 18 interest-free months on transferred amounts during that period. So do research on which banks provide that; you can check out our brief list here.

For instance, DBS Balance Transfer offers flexible repayment terms at 0% interest over three, six or 12 months tenure. Repayment starts from as low as S$50 or the minimum amount on your statement balance, whichever is higher. 

Related to this topic:
Balance Transfer: How Does it Work And Should You Get One?
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Choice 2 --- Personal Loans

Personal loans are an alternative to balance transfers for those who aren’t able to fulfil the loan repayment quickly within the interest-free period of a few months.

The major difference is that personal loans are provided on more fixed terms with regard to the tenure and loan amount. In turn, the interest rate, applicable fees, miscellaneous charges and the fixed monthly repayment are settled upon loan approval. 

In general, you can borrow up to four times your monthly income which may be more than the 90% – 95% loan of your available credit balance/credit limit permitted in balance transfers.

You're bound to find the right fit for you in our list of personal loan recommendations for 2022.

Related to this topic:

Understanding Personal Loan: Why And When Should You Use it?
Best Personal Loans For Low-Income Earners in Singapore
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However, when push comes to shove, sometimes we get badly affected during an economic crisis. We can’t be siphoning extra money towards repayments if we’re struggling to afford basic necessities. 

Hence, it’s okay to re-evaluate your debt/loan repayment plan and ensure that you’re able to keep surviving while repaying the bare minimum. Or if the situation is desperate, refinancing loans (e.g. house loans) can also be an option.

Related to this topic:
What is a Debt Consolidation Plan And How Does it Work in Singapore?
How Debt Consolidation Can Improve Your Credit Score Over Time

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Tip #5: Real estate/housing as an asset

In general, Singapore’s housing market is filled with more buyers than sellers. Demand is high but supply is comparatively low, resulting in interest rates and mortgage debt skyrocketing in recent months.

A number of home loan packages have their interest rates tied to the Singapore Interbank Offered Rate (SIBOR) and the Singapore Overnight Rate Average (SORA). Both of them are linked to interbank exchange rates.

This means that Singapore’s mortgage interest rates are directly affected by Fed rates.

Hence, with the aforementioned 0.05% Fed rate hike, a similar pattern follows for mortgages. This translates to higher costs of borrowing and therefore, more expensive home loans.

In fact, Singapore’s mortgage rates are predicted to increase by 0.75% by end 2022.

As a result, now’s the optimal time to refinance your home loans before mortgage rates increase further — switching your current home loan to an entirely new one under a different bank or financial institution offering lower interest rates.

It’s the best way to maximise your savings and free up greater cash flow as a homeowner, particularly in anticipation of a recession.

Home equity loans are also useful for getting hold of some urgent cash. Your property can serve as collateral in a loan of up to 75% of its value upon loan approval. However, this only applies to private property owners. 

Direct implications of a global recession on Singapore

Since our colonisation, Singapore has been a heavily trade-dependent economy given our strategic geographic position. On a whole, Singapore’s outward-oriented sectors like manufacturing, wholesale trade, transport, storage and financial services are already facing repercussions, explains DBS senior economist Irvin Seah.

For instance, the embargoes on food exports (e.g. chicken) are already demonstrating trickle-down effects on inflation, supply shortages, and the socio-political landscape.

Eventually, this will inevitably relay over to other sectors — it’s just a matter of time. The real question is: to what extent will the damage be felt?

Well, the silver lining behind this cloud is that economies are still in the infancy stage of the growth cycle. Hence, the impact of a recession wouldn’t be as drastic now as compared to the long and mature growth cycle previously.

On the flip side, it’s also possible that an impending recession could signal a more prolonged period of economic downturn. Only time will tell.

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