Pressure is building on the British economy. The cost of living is marching up and low interest rates mean that the value of our money is falling fast.
British businesses initially thrived when lockdown restrictions were lifted, but this could now be faltering. Economic growth slowed sharply in the last quarter, and the possibility of a recession has started to creep into analysts’ forecasts.
A recession can have a devastating impact on people’s everyday finances, as a weaker economy usually means that salaries drop and redundancies rise. Telegraph Money explains what a recession is, and how you can protect your money from the negative effects.
What is a recession?
When a country is running smoothly, the value of the goods and services it produces – its gross domestic product – grows.
But during times of an economic downturn, this value falls. A recession is when GDP drops for two three-month periods in a row, and is a sign that the economy is weakening.
How likely is a recession in the UK?
The British economy is recovering from the pandemic-induced recession last year, but this is beginning to slow. Last month the Office for National Statistics revealed that Britain’s rate of recovery was falling behind the rest of the G7, as supply chain disruptions and cautious levels of spending hit businesses.
The economy grew by just 1.3pc in the third quarter of the year, missing expectations and marking a sharp slowdown from the 5.5pc expansion in the second quarter. The British economy is still 2.1pc below its pre-pandemic size.
Analysts at research firm Gavekal have already sounded the recession alarm bell. They wrote in a report that “supply chain issues and energy shortages are likely to worsen in the coming months, which will push sterling lower”.
The firm added: “The combination of fighting inflation at a time of high energy prices means that the UK economy will likely face a recession in 2022.”
How to protect your money during a recession
Pay off debt and build up cash
First, you should try to pay down any expensive debt that you may have, such as credit cards. If you have multiple debts, address the borrowing with the highest interest rate first, and then move onto the next.
If you do not have enough cash to pay down your debt, see if you can move to a cheaper rate. This can only offer some temporary relief but will give you more time to organise your finances and stop your debt from growing as quickly.
If you have money left over, you should also try to build an emergency cash fund. This can help protect you from any unexpected bills, or even help you cope with a period of unemployment. Putting aside three to six months worth of your average expenses is a good rule of thumb.
Keep investing for the long term
While a recession often dents people’s finances, it can also be a good opportunity to invest. However, you should only consider doing so if you already have a healthy emergency fund in place and are comfortable with the possibility of losing money.
Jason Hollands, of the broker Bestinvest, said: “While recessions are undoubtedly painful for the real economy, they increasingly prompt the sorts of actions that end up being very positive for investors.”
A recession calls for a more “defensive” investment style, which means picking stocks and funds that are typically resilient during all points of the economic cycle.
Mr Hollands pointed to the consumer staples sector. While spending usually falls during periods of recession, everyday items such as toilet paper and tea bags rarely suffer.
“Stocks like Unilever, Reckitt Benckiser and Procter & Gamble would fall in this category, each of which owns vast ranges of household brands,” he said.