The Looming Recession And Its Impact
Post difficulty – Medium
We have been warned that a recession is coming to the UK, so what does that mean for you and what sort of impact could it have?
Below is a video of Andrew Bailey announcing interest rate rises and the real risk of recession. It’s quite long but helpful to get to grips with why.
What Is A Recession?
A recession is generally defined by 2 consecutive quarters of declining Gross Domestic Product (GDP).
GDP is used as a measure of economic growth. It is the value of goods and services produced in a specific period of time.
If GDP has declined over 2 quarters then a recession is triggered.
Essentially, declining GDP means declining economic growth. Over 2 quarters generally means that the decline in economic activity is persistent.
What Is Causing A Recession?
Pretty simply, it’s the cost of living crisis that we are going through. Energy prices have increased, inflation is high, people have less money to spend, real income is dropping, and living standards are decreasing.
This is causing a decline in UK economic growth.
Please read a recent post on interest rates and inflation here.
What Happens During A Recession?
Some ugly stuff!
Recessions can cause people to lose their jobs, and make it harder for people to find new jobs.
There is an increase in the need for benefits for those that are unemployed.
The more people that are unemployed the less taxes that are being paid.
This results in the government spending more on benefits but receiving less in taxes, increasing the budget deficit. Which could escalate the overall problem of declining economic activity.
Inflation is excessively high and the Bank of England are trying to bring it down with interest rate rises.
If we enter a recession and we have a persistent decline in GDP and economic growth, then we are at risk of Stagflation.
Stagflation is really the result of a perfect storm that nobody wants to see!
Stagflation is where inflation is running rampant, unemployment is increasing and economic growth is slowing. This causes a problem for governments because any method to tackle high inflation, like interest rate rises, could exacerbate the problem causing a further economic slow down.
How Long Could The Recession Last?
The last recession we had was during Covid and lasted around 6 months.
Previous recessions have lasted a lot longer, and so could this one and it will depend on how bad the economy gets. It is important to be prepared so you can wait it out.
What Can You Do?
Recessions are out of our control and we can’t really do anything to impact it. We can only help ourselves ride the wave.
Preparing in advance is critical, here is a quick breakdown:
- Save an emergency fund.
- Try to pay down debts.
- If you have investments make sure they’re diversified.
- Learn a new skill.
Save an emergency fund.
Keep at least 12 months of your total household expenditure in your savings account.
To get this figure add up all of your bills and things you’ve bought (like food, clothes etc.) on your last 6 months bank statements. Divide that number by 6 and you’ve got your average monthly outgoings. Times that by 12 and that’s how much you want in savings.
This is vital, should you lose your job you are still able to cover your expenses through your savings.
Try to pay down debts.
If you have debts like loans or credit cards, now’s the time to get them cleared/reduced or at least moved to 0% interest. Read here on useful ways to reduce your debt.
This will free up more spare money for you if the worst happens. It will also mean you don’t have to worry about paying off debt if you’re struggling to pay your bills. If you don’t pay your debt payments it could affect your ability to get credit in the future.
If you have investments make sure they’re diversified.
Investments need to be globally diversified. Each country has its own economic outlook which could affect its stock market.
If you are globally diversified you can benefit from countries that are doing well while limiting losses from those that aren’t.
Learn a new skill.
This can be difficult but if the job market is slowing and more people are looking for work, learning a new skill could be the turning point.
Keeping up to date with changes in your occupation, learning new skills, taking exams, all show a new employer that you’re willing and ready to learn. It could help them select you over someone else.