List the specific changes a downturn brings to your income, prices, credit and the value of what you own.
Kumar works at a plant and has been through two downturns there. Both times, the overtime roster went quiet first, and it stayed quiet for a long while before anyone at the plant used the word retrenchment.
The usual picture of a recession is mass layoffs. Many downturns start more quietly. When orders drop, a firm looks for savings that keep its staff in place, since hiring and training new people once business recovers costs a lot. From outside the company, you seldom see any of these early savings.
The cuts tend to arrive in a familiar sequence. Hiring is frozen first: empty positions are left unfilled and new projects wait. Overtime is reduced next, and then bonuses get smaller. After that, contract and temporary staff find their contracts are not renewed, and some firms ask employees to use up leave or work shorter weeks. Retrenchments come last, and only when the downturn drags on or gets worse.
Kumar's plant followed that pattern closely. The overtime dried up first. At year end his bonus was smaller and came with a memo about "a challenging year". Contract workers left when their terms ended. The retrenchment announcement came after all of this, and by that point most of his colleagues had been spending less for months because their pay was already lower.
The unemployment rate picks up none of these early steps. Someone whose overtime disappears still counts as employed. Households can have lost a large part of their income while the official figure has barely moved. For that reason the unemployment rate is a late signal, meaning an indicator that only moves once household income has already dropped. Lesson 4.2, "Indicators to watch: GDP, hiring, inflation and the yield curve", makes the same point about unemployment.
Take Kumar's pay. His basic salary is S$6,000 a month. In a good year he earns roughly S$600 a month in overtime, receives an annual wage supplement (AWS) of one month, and gets a performance bonus worth three months of basic pay. Over twelve months that is S$72,000 in basic pay (S$6,000 x 12), S$7,200 in overtime (S$600 x 12), S$6,000 of AWS and an S$18,000 bonus (3 x S$6,000), for a total of S$103,200.
In the downturn year, the S$6,000 monthly basic does not change. Overtime falls to nothing. The company still pays one month of AWS, but the performance bonus shrinks to one month. The year's total is S$72,000 basic, S$6,000 AWS and S$6,000 bonus, which comes to S$84,000.
The gap is S$19,200, about 19% of his good-year income (S$19,200 / S$103,200). Kumar kept his job and his salary was never reduced. The loss came entirely from the performance-linked parts of his pay, while the fixed part stayed untouched.
Variable pay is whatever depends on how the company performs: overtime, performance bonus, commission. Fixed pay is basic salary, which stays the same in a downturn year. In a bad year, variable pay drops earliest and furthest, and basic pay usually holds.
People paid on commission take a sharper hit, with bigger drops that arrive without warning. That group covers property agents, financial advisers, many people in sales and the self-employed. If variable pay makes up much of what you earn, base your budget on the fixed portion only.
Money that arrives regularly can feel like normal income even when it carries very different risk, and more than one variable source can drop within the same year. Kumar has weekend tutoring as a side income. In each of his two downturns, his basic salary stayed put while overtime, bonus and tutoring earnings all fell together.
When the economy weakens, more borrowers miss payments, so lenders get more cautious. Banks set stricter terms on new loans, check income more closely and take longer to say yes. Someone who would have been approved last year may be turned down this year because their income has just fallen. Moving a mortgage to a cheaper rate can get harder for the same reason: the lower income no longer supports the refinancing.
The need to borrow, whether to bridge a gap or to pull debts together, peaks just when banks are least willing to lend. Lesson 4.4, "Money moves that make sense in a downturn, and ones that do not", takes this to its conclusion: set up your safety margins during calm periods, while lenders are still relaxed.
Markets price in what they expect, so share prices often drop before a recession is officially recognised, and they generally keep dropping once it arrives. Expect your share portfolio and any investment-linked policies to show lower values, sometimes much lower. That drop stays on paper and becomes a realised loss only if you sell.
Central banks usually cut interest rates in a recession to support their economies, and Singapore rates tend to move with them (module 2 explains this). For anyone on a floating rate mortgage, monthly instalments can fall after a few resets, one of the few bits of good news a downturn brings. Savers get the other side of it, as fixed deposit and T-bill yields go down.
With weaker demand, inflation usually slows. Some prices may ease as sellers chase fewer buyers, travel and big-ticket items among them. Property prices can ease as well, though Singapore housing depends heavily on government policy, so how it moves differs from one downturn to the next.
Your income splits the same way Kumar's does, into pay that holds up in a bad year and pay that falls with the business. Write down every source of income you have. Then recall the last downturn you went through, such as the pandemic, a slump in your industry or a poor year at your company, and note what happened to each source at the time. Put each one into one of two groups: pay that holds up in a bad year, or pay that falls with the business. Finally, go through your budget and mark the assumptions that would not survive a bad year, along with the parts of your finances that would be exposed first, for example a loan you plan to take, a mortgage you hope to refinance or investments you might need to sell.
List your sources of income. Mark each one fixed or variable, and note how it held up in the last downturn you lived through.
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