It’s official: the UK is in recession for the first time in 11 years, after suffering its biggest slump on record between April and June. Which explains why the word ‘recession’ has been trending on Twitter all week long.
To put things in perspective, this means that the economy shrank 20.4% compared with the first three months of the year, that the national debt is expected to rise above 100% of the GDP, and that it is going to stay there.
It’s all too easy to switch off from economic news, especially as reports are so riddled with financial jargon. And so, in a bid to help you better understand what’s going on, and what this means for us all going forward, we reached out to financial experts for their insights.
Here’s what they had to say.
First things first, what is a recession?
To put it in its simplest terms, a “recession is a period of economic decline, where the economy shrinks in terms of productivity,” explains Sam Smethers, chief executive of the Fawcett Society.
Elena Vallin, chief financial officer at the financial wellbeing app Dreams, breaks things down further, saying: “To paint a picture, it’s a cycle in which demand for products and services starts to decline. In response, businesses produce less, which means they generate less, and this can lead to needing to employ fewer people or going out of business altogether.
“As individual uncertainty about the future increases, the willingness to continue spending also declines, which in turn slows down business activity even further. A recession is marked by a period of uncertainty that can lead to stress, but it’s typically also a period that makes people reflect on their financial wellbeing and try to adapt in a way that makes them resilient in the face of uncertainty.”
And how did the coronavirus pandemic bring this about?
“Covid-19 necessitated strict restrictions around the world, with many countries experiencing full lockdowns,” says Vallin. “The uncertainty about the length of the pandemic coupled with measures to keep people from contracting the virus led to reduced consumption of goods and services as well as to reduced output.
“Unemployment around the world has already risen and we continue to witness business closures. Overall, looking at economies globally, we see significantly reduced business activity, lowered growth projections, and preparations to support large groups of individuals who will be facing harsh times ahead.”
However, Andy Barr, personal finance expert and co-founder of online price-tracking website Alertr, adds: “The UK was already close to a recession even before the coronavirus hit. It was really no surprise, but because it happened during the current pandemic economic analysts aren’t taking it as badly as they may have done if it were to happen before, or if there were to have been no pandemic.
“They expect the economy to bounce back, driven largely by a series of expenditure announcements by the Chancellor that will give the business community the confidence to hire again and, in turn, give consumers the confidence to spend money again.”
How will the recession affect us?
“Recessions affect us on an emotional, psychological and financial level,” says Vallin. “The uncertainty cannot be predicted, neither the depth or length of it. On a human level, uncertainty increases stress levels. In addition to the ongoing threat to our health, we feel the threat to our economic well being and question whether and how we can weather this financial storm.”
George Charles, spokesperson for Money Saving Heroes, adds: “The effects of a recession are different for everyone and it will certainly be more severe for some than others. If we are going off the last recession, mortgage interest payments fell considerably so there could well be benefits for some.
“However, those less fortunate will be hit particularly hard. Unemployment rates will likely rise also as many organisations and businesses are forced to make redundancies, with the furlough scheme not being enough to prevent job losses and recovery will be slow due to the pandemic and its lasting effects.”
Who will be the worst affected?
“Recessions are unkind to vulnerable individuals,” notes Vallin. “As the availability of jobs declines and joblessness continues for an unknown period of time, individuals with limited to no access to savings and those who are indebted will be impacted the worst and will need to rely on the state or family and friends for their livelihoods.
“Similar vulnerability applies to those whose skills or level of experience will not match remaining business activity.”
And how will the recession impact women?
“A recession is particularly bad for women as all the indicators are that they are already being hardest hit by job losses, reductions in working hours and also falling pay,” says Smethers.
“This is because the sectors that are female-dominated have been the first to be shut down, because they are over-represented in low paid, insecure jobs and also because of school closures and a lack of childcare.”
Tabitha Morton, deputy leader of the Women’s Equality Party, adds: “The government’s response to the pandemic has been completely gender-blind.
“As a result women have already been hit harder by the economic impact, whether through being furloughed first, already having lost their jobs, or desperately trying to juggle home schooling and childcare with working from home in a bid to save their careers.
What can the government do to prevent this?
“Many women, particularly BAME women, disabled women and single mothers, are still reeling from the effects of over a decade of austerity that was a political choice made by the Coalition and then Conservative governments in response to the last crash,” says Morton.
“This recession is an opportunity to rip up the old ways of doing things and build an economy and society that works for everyone. The Women’s Equality Party is calling for a care-led recovery, because investing in care – childcare, social care and health care – creates twice as many jobs as investing in roads and railways.
“Investing in care puts money in the pockets of the female workforce and their families who most need it. And investing in care frees women who otherwise shoulder the lionesses share of unpaid care to hold onto their jobs – and their mental health.”
What can we do to protect ourselves?
“We need to try and build up resistance to recessions, and that means ensuring strong financial wellbeing on a personal level,” says Vallin. “ We can better weather recessions by having access to buffer savings, prioritising repayment of debts (particularly those that are related to consumable goods such as clothing or experiences such as travel) and learning to live more sustainably day to day to ensure longer-lasting resilience.”
Charles, meanwhile, suggests: “If you are currently employed, set aside some money each month for an emergency fund just in case you do suddenly lose your main source of income. However, whilst it is important to do this, make sure you are not saving more than you can afford by setting aside enough for any bills that are due and food for the week before you put anything away. You do not want to be caught short.”
And Smethers urges readers to “get some advice, know your rights, and join a union.”
“You can also support charities like The Fawcett Society and help us to fight inequality for the benefit of everyone,” she adds.
How should we approach our savings?
Bukiie Smart, author of The ABCs of Personal Finance and founder and editor of Save Spend Invest, a personal finance platform helping millennials learn to manage their money, explains: “Unfortunately falling interest rates usually accompany recessions, however, the Bank of England already cut interest rates twice this year due to the impact of Covid-19.”
She goes on to suggest: “For borrowers, this means they pay less interest on their borrowed amount, however, it’s the opposite for savers as your money will be earning less interest from the bank. To protect your savings, the main way is to increase it and not think about trying to find the best bank with high-interest rates because there will be little to none.
“Cut back on eating out and buying luxury and start (or increase) your rainy day fund. A recession comes with a lot of uncertainties and it is when you need emergency funds more than ever.”
So, is a recession really as scary as it sounds?
“It is important to note that the Bank of England predicts that the economy will grow in the third quarter of 2020,” says Vallin. “Still, we should be humble in predicting the future as we haven’t seen the scale of the economic impact that a pandemic can cause before.
“But the notion of a recession sure can be scary, as it comes with high levels of uncertainty, which in turn can make us feel stressed or anxious.”
She adds: “It is difficult to know exactly what the future holds in terms of the wider UK economy, but those that are able to should use this period of economic downturn as an opportunity to make positive changes and rethink how they manage their finances.
“Even if you’re only able to make small-scale adjustments to your spending habits, now is a perfect time to see where you could make savings and start building a buffer. Not only will this ensure you are better prepared for the unknown, but it will also help you restore a sense of control and serve you both financially and mentally.”
Smart, meanwhile, says: “For a lot of young working adults, this is our first recession where we might see a direct hit on our finances and lifestyle. Some job losses are expected and this recession compounding on top of coronavirus may mean job promotions and pay rises will be halted or non-existent.
“The ‘scary’ part of a recession is that you just don’t know what it might mean for you until it ‘hits you’ but everyone goes through it differently. Some may not see much of a difference if they are in ‘secure’ jobs and already have a high income which can support some increase in the cost of living, however, a lot of adults would see significant differences in lifestyle and finances and have to adapt.
“The economic downturn will hit businesses that affect every working person and how they are able to afford their current lifestyle.”
She finishes by noting: “Overall, the way to protect yourself is to plan as far as possible. Plan for your rainy day fund. Plan to cut back on non-essentials and plan your worst-case scenarios. Doing this will help you feel more confident in dealing with the recession.
“We’ve been through recessions before and come out swinging, so there’s nothing to be scared of if you’re well prepared for it.”
Remember: always speak to a Financial Conduct Authority registered financial adviser before taking financial advice, and think carefully before making any decision.