You will be able to list the specific changes a downturn brings for income, prices, credit and asset values.
When people picture a recession, they picture mass layoffs. Kumar's two downturns did not start that way. The first thing he noticed was that the overtime roster went quiet. Then the year-end bonus came in smaller, with a memo about "a challenging year". Contract staff were not renewed. Only after all that did the plant announce retrenchments, and by then most of his colleagues had already cut their spending months earlier, because their pay had already shrunk.
Knowing the order in which a downturn reaches a household tells you which parts of your own finances are exposed first, and which assumptions in your budget would break.
Firms facing falling orders try to save money without cutting staff, because hiring and training people again later is expensive, and the early measures are ones outsiders rarely see. Hiring freezes come first: vacant positions stay empty and new projects are put on hold. Overtime is cut back. Bonuses shrink. Contract and temporary workers are not renewed. Some firms ask staff to take leave or move to shorter weeks.
None of these show up in the unemployment rate. A worker who loses overtime is still employed. But for the household, income has already fallen, sometimes by a lot.
Retrenchments usually come later, if the downturn lasts or deepens. That is why the unemployment rate, as lesson 4.2, Indicators to watch: GDP, hiring, inflation and the yield curve, pointed out, is a late signal.
Here is how Kumar is paid, with made-up figures. His basic salary is S$6,000 a month. In a good year he earns about S$600 a month in overtime, a one-month annual wage supplement, and a performance bonus worth three months of basic pay. That comes to S$103,200 for the year.
In a downturn year, his basic salary stays the same. The overtime goes. The annual wage supplement is still paid, but the performance bonus drops to one month. His income for the year is S$84,000.
He has not been retrenched and his pay has not been cut, and he is still S$19,200 worse off, a fall of about 19%. Every part of his pay that depended on how the company did was hit, and the fixed part was not.
The same applies more sharply to anyone paid mostly by commission, such as property agents, financial advisers, many sales roles and the self-employed. Their income can fall by far more, and with no notice. If a large share of your income is variable, your budget should be built on the fixed part.
In a downturn, lenders become more careful. Banks see more borrowers falling behind, so they tighten the terms on new loans, look harder at income, and are slower to approve. Someone whose income has just dropped may find that a loan they would have got a year ago is now declined, or that refinancing a mortgage to a cheaper rate is harder because their income no longer supports it.
This is the cruel timing of credit. The moment people most want to borrow, to cover a gap or to consolidate debts, is the moment it is hardest to get. Lesson 4.4, Money moves that make sense in a downturn, and ones that do not, draws the conclusion: arrange your safety margins while times are calm and lenders are still relaxed.
Share prices often fall before a recession is officially visible, because markets look ahead. They usually fall further during it. Anyone who checks a share portfolio or an investment-linked policy during a downturn will see lower values, sometimes sharply lower. That fall is real on paper, and it only becomes a realised loss if you sell.
Interest rates often fall in a recession, because central banks cut to support their economies. As module 2 explained, Singapore rates tend to follow. For a household with a floating rate mortgage, that is one of the few pieces of good news, because the instalment can come down after a few resets. Savers see the other side: fixed deposit and T-bill yields fall.
Inflation usually eases as demand weakens, and some prices, such as travel and big-ticket items, may soften as sellers compete for fewer buyers. Property prices can soften too, though housing in Singapore is shaped heavily by government policy, so the effect varies from one downturn to the next.
What Kumar took from two downturns was that the parts of his pay that felt like normal income were not all equally safe. His basic salary held. His overtime, bonus and the side income from weekend tutoring all fell in the same year.
Your own income has the same split between pay that holds up in a bad year and pay that falls with the business. Go through every source you have and think back to the last downturn you lived through, whether that was the pandemic, an industry slump or a bad year at your company, and how each source behaved.
List your income sources and mark each one as fixed or variable and how it fared in the last downturn you lived through.
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