Can we avoid recession, and what happens to your money if we don’t?
It feels like we have been hearing the ‘R’ word for longer than we would care to mention, with economists checking every piece of economic news to find out whether we are in recession or not, and trying to forecast when, or if, this will happen.
But what happens if the economy does enter recession, and how will ordinary households notice when this has happened?
The following answers may help you to understand.
Q. What is a recession?
A. Many of us think that recession is defined by visible signs such as lines of unemployed people or closed shops. It’s a technical term, however, meaning that the value of a country’s Gross Domestic Product (GDP) has fallen for two quarters in a row.
The reason why the measure matters is because it is a sign that the economy is doing badly, and therefore some of the signs that we worry about – redundancies, store closures and other problems – are likely to follow.
Q. Why are economists worried about one now?
A. Many experts are predicting that the UK economy will fall into recession. The Bank of England’s latest quarterly Monetary Policy Report suggests that we will enter recession from the fourth quarter of this year.
Q. How will I know if we are in one?
A. There will be plenty of press coverage if the economy technically enters recession. Although the passing of this technical threshold may have a little immediate effect on day-to-day living immediately, it is likely to coincide with symptoms showing that the economy is in trouble, such as continued inflation, redundancies, and defaults on debt due to high interest rates.
Q. What has happened to people’s money in a recession in the past?
A. Every recession is different and the impact on finances can vary. The last recession was during the Covid-19 pandemic and was caused by a very specific set of circumstances. The furlough payment scheme minimised the financial impact for many families, and in fact, savings pots increased in many cases due to what the Government called ‘forced saving’ – people hoarding money because there was nothing to spend it on.
The stock market fall caused by the pandemic also reversed quickly.
Other recessions have been very different. The recession in 2008-9 was the deepest since the Great Depression, lasting for five quarters of negative growth, with all sectors affected.
Employment reached its highest rates since 1995, and earnings lagged prices, so people felt poorer1. The stock market also struggled.
Q. How does a country get out of recession?
A. When GDP stops falling, a country is no longer in recession. They can be ended partly by national policies to stimulate spending, such as tax cuts, but global issues, such as war in Ukraine, make a difference too.
The scars, such as unemployment or lower household spending power, may linger after the recession ends.
Will a recession really make a difference to me?
A. While recession is an economic number, the effects of it will be felt by everyone. Higher inflation, tamed by higher interest rates, may affect spending power but also the ability to save for the future. Customers often spend less, so companies struggle, and the stock market falls. Jobs are less secure, and wage growth is slower.
Q. How should I prepare my finances?
A. A recession is a tough time but there are steps you can take. A diversified portfolio of investments can guard against short term dips in value in certain sectors while taking a long-term view should ensure you do not struggle with short term blips in stock market value.
Having savings and a plan in case you lose your job is wise, while a ‘rainy day’ fund should be kept in an easy-access savings account at as high a rate as possible to stop it losing too much value due to inflation.
Recessions can be a good time to invest, as strong businesses are often undervalued at these times, and investors can take a stake before they bounce back.
An expert adviser will be able to help you to understand how best to prepare your own finances for this period.
26th September 2022