Millions of British households are already feeling the pinch thanks to a cost of living crisis that has seen energy and grocery bills at a historic high. And there are fears that the worst is still to come, with the Bank of England reporting that the UK could be in for its longest recession since records began.
The latest data from the Office for National Statistics indicates that the UK economy shrank by 0.2% in the three months covering July to September. If the economy shrinks again this quarter (which is very likely), we will officially be in recession.
But what exactly is a recession, and how will it affect us as individuals? Read on to find out more.
What is a recession?
In 'normal times', a country's economy is supposed to grow as the value of the goods and services (Gross Domestic Product or GDP) increases and people become ever so slightly richer. But, sometimes, GDP falls, and that's where talk of a recession starts.
A recession is usually defined as when a country's GDP has fallen consecutively for 2 3-month periods (or quarters), and it's a key indicator of a poor economy.
The last time the UK went into recession was at the height of the COVID-19 pandemic in 2020.
Why is the UK facing another recession?
The Bank of England says the UK will likely be in recession for a prolonged period throughout 2023 and into the first half of 2024. The blame? Rising prices throughout the year, particularly for energy and food, mean people have less money to spend and are putting less back into the economy.
How will a recession affect people living in the UK?
There isn't a 'one size fits all' answer here, as we must recognise that it all comes down to personal circumstances.
Economic growth usually means more jobs and better pay - what everyone wants to hear. Higher wages and larger profits from a growing economy also mean the government collects more in taxes and, therefore, can spend more on benefits and public services.
Unfortunately, in a recession, it's the opposite of all of this.
Expectations of a recession
In a recession, we will likely see an increase in unemployment as businesses struggle to manage their costs. It will also probably mean that school leavers and graduates find it difficult to secure their first jobs.
Despite shrinking unemployment rates since the end of 2020, there has been a slight increase in the 3 months to February this year, and it currently sits at 3.6%. However, the Bank of England forecasts it will rise to 6.5%. At the height of the 2008-2009 recession, unemployment peaked at 10%.
The cost of living crisis and potential recession will see everyone trying to save money, including businesses. For employers, this will likely mean halting pay raises for workers. Unfortunately, this means there will be a disparity between workers' real-term pay cheques and the cost of energy and everyday essentials, which are still spiralling.
As we mentioned earlier, some people are more negatively affected by a recession than others.
Will there be another Credit Crunch?
As more people cannot pay their bills during a recession, lenders tend to tighten their criteria for their financial products, including mortgages and car loans. This means people need a higher credit score or larger deposit to secure a loan.
You will likely remember the 2008-2009 recession led to what was known as the 'credit crunch,' which saw people struggle to find options for borrowing money and might be wondering whether this will happen again. The latest figures from the Bank of England's Credit Conditions survey show a slight increase in unsecured credit in the 3 months to the end of May and then a decrease in the following 3 months to the end of August.
How can the UK get out of recession?
When a country's economy cannot grow at the same time it experiences high inflation, it's known as 'Stagflation' - a tough challenge to overcome. The Bank of England would usually be expected to cut interest rates and make it cheaper for businesses and households to borrow money to boost spending and grow the economy. However, because prices are rising so quickly, the Bank of England has instead chosen to increase interest rates to the highest they have been in almost 30 years to slow borrowing and bring inflation down.
The Bank of England warns inflation will remain at 10% in the near term but begin to fall sharply halfway through 2023 as interest rates rise. It forecasts that inflation will fall below 2% in the following years.
The government is set to officially announce its policies to combat the recession on 17th November 2022. During the Autumn Budget, the Chancellor is expected to cut government spending in some areas and increase taxes in others.
What can I do to improve my financial position in a recession?
Pay down expensive debt - The top piece of advice in a recession is to try and pay down any costly debt you have, such as credit cards. If you have multiple debts, always address the highest interest rate first and then move on to the next. However, we appreciate that many people will have little spare money to do this, so we suggest moving your debt to a cheaper rate wherever possible. While it'll only provide temporary relief, it will give you more time to organise your money and prevent your debt from growing as rapidly.
Start an emergency cash fund - Another tip to improve your financial outlook in the UK recession is to start an emergency cash fund to protect yourself from unexpected bill increases and unemployment. But, again, we appreciate that only those in a fortunate financial position can achieve this during difficult times.
Manage your taxes - There are few certainties in life, but taxes are one of them. In difficult economic times it can be tough to build up sufficient cash reserves to settle your potential tax liabilities, which can cause further financial difficulties. We may be able to help you manage this in a variety of ways, including:
- Assistance in establishing a payment plan with HMRC, to settle any outstanding tax liabilities
- Identification of potential tax reliefs which you are not currently benefiting from
- Help chase tax refunds due to you, from HMRC, to aide your cash flow
- Reducing your tax payments on account for the following tax year (subject to your expected income) to further help cash flow
Book a free consultation with us to help determine the best course of action for your finances to get advice regarding your personal tax position.