What is a recession and how can it affect you?

The official figures came out last month and confirmed that the UK ended 2023 in a recession. The ONS stated that the economy shrank by 0.3% between October and December 2023. So, what is a recession and how can it affect you?

What is a recession?

A recession is a significant decline in economic activity that lasts for a prolonged period, typically marked by a decrease in gross domestic product (GDP), income, employment, industrial production and sales. It is a downturn that impacts various sectors of the economy, from businesses to consumers. If this has happened over a quarter, then it is deemed a recession.

For the average person in the UK, a recession can manifest in several ways, affecting financial stability and everyday life.

How can it affect you?

Employment

During a recession, businesses may implement cost-cutting measures, including laying off workers or reducing hours. This can lead to increased unemployment rates and heightened job insecurity for individuals. Graduates may not be able to find roles. Those already struggling to find stable employment may face even greater challenges, increasing financial strain.

Income

With job losses and reduced working hours, many individuals may experience a decrease in income. This can make it difficult to cover essential expenses such as rent or mortgage payments, utilities, and food. As disposable income decreases, less is spent in the wider community, affecting various industries and businesses.

Debt

For those already grappling with debt, a recession can exacerbate financial burdens. Reduced income and increased expenses may make it challenging to keep up with debt repayments, leading to further accumulation of debt or defaulting on repayments. High levels of debt can create a cycle of financial instability, making it crucial for individuals to seek proactive debt management solutions. We can help with this point – contact us if you find yourself in this position and we can offer you advice or point you in the right direction to seek help.

Housing

The property market often feels the effects of a recession, with declining house prices and reduced demand. Homeowners may see the value of their properties decrease. Additionally, those struggling financially may face difficulties in keeping up with mortgage payments, potentially leading to repossession.

Confidence

Economic uncertainty during a recession can dampen consumer confidence, leading individuals to adopt a more cautious approach to spending. This can have a ripple effect on businesses, particularly those reliant on consumer spending, further contributing to the economic downturn.

How to weather the recession storm

For many, it is not the first recession rodeo that we have had to endure. In recent times there have been two recessions – one in 2008 that lasted for 15 months, and the other was in 2020, at the height of the pandemic. This lasted only six months but it was the largest fall in GDP ever recorded.

The silver lining this time is that this has been called a “shallow recession”, meaning that we may not stay in it for very long. However, times are turbulent in the UK with a general election on the horizon and we really do not know what is around the corner in terms of the economic outlook.

Some tips on how to weather the recession are below:

• Assess your financial situation and review your income, expenses and savings to get a clearer picture of your financial placing. Read our blog post on how to carry out a money overhaul to help with this
• Create an emergency fund if you are in the position to do so. Aim for 3-6 months’ worth of living expenses in an accessible savings account
• Focus on reducing your high interest debt by paying a bit extra per month or look to transfer balances
• Diversify your investments if you have any. Reduce any risk that you may be subjecting yourself to in terms of investment
• Try to cut any unnecessary expenses from your budget. Check your subscriptions, memberships and services to see whether they are still serving you
• Limit spending on dining out, entertainment and expensive gadgets. We understand that this means less disposable income going into the wider economy but in order for a UK household to survive a recession, sacrifices need to be made
• If you have the time, then look to start a side hustle. There are many freelancing opportunities out there to supplement your main source of income. We have a lot of resources on this subject – just search our “Money Savvy series”