TL;dr: The Bank of Canada's third quarter surveys show about 53 percent of consumers expect a recession in the next 12 months, while only 6 percent of businesses do. Consumers expect prices to rise 4.03 percent over the next year and incomes to grow only 2.13 percent, and spending intentions fell 13 points. The useful response is not to predict which side is right. It is to build a budget with three scenarios, cut tiers, and triggers, so the decision is made in advance instead of in a panic. The template below does exactly that, with a worked example.

On Wednesday the Bank raised its policy rate to 2.50 percent, and prime followed to 4.70 percent, which is the backdrop for this whole exercise, because a higher prime rate makes borrowed money a worse buffer at exactly the moment households feel squeezed. Earlier this week we looked at decision day scenarios, and the hike landed more or less as priced, so the question now is what you do with a household budget when the news says recession and your employer is not acting like one is coming.

The numbers come from the Bank's Canadian Survey of Consumer Expectations and its Business Outlook Survey, both released October 19. About half of consumers expect a recession within a year, basically unchanged from the second quarter, while the share of firms expecting one fell from 17 percent to 6 percent, the lowest reading since the question was introduced in 2023. Five year inflation expectations jumped to 3.91 percent from 3.39 percent, the highest in roughly four years, and consumers expect prices up 4.03 percent against income growth of 2.13 percent, which is a real squeeze of about 1.9 percentage points even if nobody loses a job. One honest caveat is that roughly three quarters of the responses came in before Canada-US trade talks broke down on August 21, and the responses collected after that were more negative, so if anything the consumer pessimism is understated rather than overstated.

The gap matters because the two sides imply different budgets. If you budget like the consumers, you slash everything now and live miserably through a recession that may not arrive. If you budget like the businesses, you change nothing and get caught flat footed if the consumers turn out right. The middle path is to keep spending normally, but decide in advance what gets cut and what triggers the cut, so you are reacting to your own numbers instead of to headlines. That is what scenarios are for.

Setting up your scenario budget: first, open the template and make a copy, because the template itself is read only and your copy is where the numbers live. Second, go to the Budget and tiers tab and replace the example rows with your own monthly lines, and mark each line with a tier or leave the tier blank if the bill is fixed. Tier 1 is the stuff you can pause without real pain, like subscriptions and takeout. Tier 2 is lifestyle spending you would miss but can live without, like entertainment, clothing extras, and the travel fund. Tier 3 is the last resort, the things you only cut when a trigger fires. Third, edit the inputs, meaning the price rise rate on essentials, the variable payment reset if your mortgage repriced after the hike, and the incomes and cash buffer on the Scenarios tab. Fourth, read the scenario rows, which is where the whole point lives.

Worked example, using the numbers already in the template: a household bringing in 7,500 dollars a month after tax, spending 6,200 dollars in the base case, which leaves a 1,300 dollar surplus. In the downside case, prices rise 4 percent on the 1,950 dollars of essentials, which adds 78 dollars, and a variable mortgage resets by 69 dollars, which is the payment change from the decision day example on a 500,000 dollar balance. That takes spending to 6,347 dollars before any cuts, and cutting Tier 1 alone, subscriptions and takeout worth 550 dollars, brings it to 5,797 dollars, which is still comfortably covered by the same 7,500 dollars of income. The lesson is that the downside case does not require suffering. It requires pausing two categories. In the severe case, one income disappears and household income falls to 4,200 dollars, and cutting all three tiers takes spending to 4,497 dollars, which leaves a shortfall of 297 dollars a month. A 10,000 dollar cash buffer covers that shortfall for about 34 months, which is the runway number on the Scenarios tab, and that is the number worth knowing before anything bad happens, because it tells you how long you have to find the next income.

The triggers are what keep this from being a document you build once and forget. On the Triggers tab, write down the signal and the action for each one, and use your own numbers. Spending over plan two months in a row activates Tier 1. A cash buffer below three months of base spending activates Tier 2. A paycheque drop or a layoff notice activates Tier 3, and the action there includes calling your lender before missing a payment, because lenders have options for borrowers who call early and far fewer for borrowers who simply stop paying. A variable payment reset above your ceiling means re-running the downside column and moving the difference into Tier 1. The rule is simple, and it is the whole post in one sentence: triggers decide, not headlines.

One more mechanical point, because prime at 4.70 percent changes the buffer question. A cash buffer and a HELOC are not the same thing, and the difference matters more now than it did at lower rates. Ten thousand dollars drawn on a HELOC at prime costs about 39 dollars a month in interest, and the lender can reduce or freeze the line exactly when you need it most, which is what happened to plenty of borrowers in past downturns. Cash in a savings account costs nothing to hold and cannot be taken away. If your buffer currently lives on a credit line, the cheapest move in this whole post is to start moving it to cash, a few hundred dollars a month, before you need it.

Build the three scenarios once, write down the triggers, and then go back to spending normally. If the consumers are right, you will know what to cut and when, and you will have a runway number instead of a panic. If the businesses are right, you will have spent an hour on a spreadsheet you never needed, which is a cheap price for sleeping well either way.

Template: template: Recession scenario budget (Google Sheets, make a copy to use it)

- Francois