A recession is coming, here is how to prepare your finances

The UK could fall into a recession by the end of the year – and it could last for the whole of 2023. Saloni Sardana explains what to expect, and how to prepare your finances.

UK inflation hit double digit figures this month, with CPI at 10.1%. The Bank of England had prompted jitters earlier this month when it said inflation would peak at 13%, but fast-rising prices for natural gas “have left economic predictions out of date,” says the Financial Times, and UK inflation forecasts have gone through the roof.  

Bank Of America expects inflation to reach 14%, while both EY and Goldman Sachs expect it to hit 15%. The most pessimistic projection comes from Citigroup, which says UK inflation could hit more than 18% next year, exacerbating a full blown cost of living crisis.  

With higher inflation come higher interest rates. That hits growth and raises the possibility of a recession. Indeed, the Bank of England is saying that the UK will enter a recession by the end of the year and that it could last for much of 2023. 

What is a recession? 

A recession is when two quarters of negative GDP growth is recorded. This happened during the depths of the pandemic, but it was rather short-lived compared to similar events such as 2008’s Great Financial Crisis.  

The US economy has recorded two consecutive quarters of negative economic growth, potentially ushering in the start of an “unofficial” recession –  a recession is only officially declared in the US when the country’s National Bureau of Economic Research concludes that one has begun.  

While GDP is still currently growing in the UK, its growth is slower than the pace at which prices and incomes are rising.  

So what would a recession mean for your money? 

Expect job losses and lower wages 

The Bank of England is predicting that unemployment will rise each year until 2025.  

After the Covid shock of 2020, unemployment had been in decline. But it started to tick up a little in the three months to February, and has been fairly stable at around 3.8%.  

But with a recession on the cards, unemployment is likely to shoot up as companies try to cut their costs. Unemployment hit 10% during the 2008 financial crisis.  

Prepare for higher mortgage rates 

People with mortgages – especially those on variable-rate mortgages – are likely to face a sharp rise in repayments, assuming the central bank continues to raise interest rates.  

The Bank of England raised interest rates to 1.75% earlier this month. This is a sharp rise from December 2021, when interest rates were 0.1% in the UK.  

If you are on a variable rate mortgage, your mortgage repayments are likely to go up immediately, according to Melanie Spencer, head of payment and mortgage services and business development director at mortgage broker Finova.  

“Consumers that have opted for fixed-rate products could be insulated from rate rises for some time, however, they may still find themselves struggling with late payments and foreclosure due to other financial hardships,” she says.  

But there may only be limited breathing space for some on fixed-term mortgages, as trade body UK Finance predicts that 1.3 million are due to expire later this year, meaning they will have to refinance at the new, higher rate.  

If you borrowed £200,000 over five years at a fixed rate of 2.85% – the average in 2017 – you would be looking at refinancing at the current average rate of 3.89%, says Ruth Jackson-Kirby. That would leave you £1,656 a year worse off. 

Expect lower benefits  

The recession is also likely to translate into lower benefits, as benefit payments typically do not rise in line with inflation.  

“As the benefit values are fixed whilst inflation increases, it means you will be left with less and less money to be able to heat your home or feed yourself,” says Julian House, personal finance expert and managing director at My Favourite Voucher Codes.  

Credit crunch and an inverted yield curve 

A credit crunch is a situation when there is a sudden drastic fall in the availability of money or credit from lenders, greatly reducing the availability of borrowing options for people. This is what happened during the Great Financial Crisis, lowering peoples’ ability to buy goods, further slowing the economy. 

A credit crunch usually signals the beginning of a recession, so it is more likely to be a cause rather than an outcome, but a credit crunch has ramifications for peoples’ disposable incomes.  

Bloomberg reckons that the yield curve is inverting, something that will further lead to a halt in lending.  

“I see the Treasury yield curve inverting as much as a half-percentage point. Eventually we will face a sudden halt of credit to the weakest borrowers. Sectors to watch include leveraged loans, emerging markets, and European debt,” says Bloomberg’s Edward Harrison.  

How to prepare your finances for a recession

The good news is that there are steps that almost anybody can take to mitigate the impact of a recession on their finances.  

Review your monthly expenses The obvious thing to do is to review your monthly expenses and see which can most easily be cut from your monthly spending, says House.  

“Check bank statements and get out a highlighter pen to evaluate your monthly purchases and outgoings to see what can be cut.” 

Cut your subscriptions According to House, cutting out your subscriptions can yield substantial savings. This is because the average annual UK household spend on subscriptions is £552. “This equates to roughly £46 a month haemorrhaging from accounts from subscription boxes, highlighting the age-old phrase ‘time saved, is money spent’.” 

Protect your mortgage Those who lose their incomes or face a slump in the value of their homes will find it harder to remortgage, says This is Money. So one solution could be to fix your mortgage now, so you have the peace of mind of knowing exactly how much you are spending.  

“If you are in any doubt about the security of your job should the economy take a turn for the worse, fix your mortgage so you can budget safe in the knowledge that your repayments won’t go up,” says Jamie Lennox, director of mortgage broker Dimora Mortgages.  

Cut your petrol bill As petrol prices have shot up, it is important to keep your fuel costs down. You can read more about how to cut your fuel bill here.  

Cut your energy bills And with the energy price cap expected to be more than £4,500 next year, finding a way to reduce your energy bills is more important than ever before.  

Setting up a direct debit is a useful strategy in reducing your energy bill as it lowers the cost by roughly 7%, and also means you won’t miss a payment. You can also reduce the temperature at which you shower and make sure unused appliances aren’t switched on.  

Check our sister publication the Money Edit’s article on 17 hacks to cut energy costs

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