It’s official – the cost-of-living crisis has been a part of headlines and life as we know it for more than a year now. What started as a hint of trouble in our energy bills and on supermarket shelves towards the end of 2021 has turned into a grim reality – one that has forced many to face a level of financial anxiety beyond what they could ever have anticipated.
We have seen flashes of light at the end of the tunnel. The Office for Budget Responsibility recently predicted that 2023 will see a gradual decline to the consumer price index, and that we could (tentatively) earmark 2024 as the year when wages started to feel more measured against the general costs of living.
Then again, in late May, Prime Minister Rishi Sunak warned that there may still be a few dark corners to turn, from 5%+ mortgages to food costs that continue to rise and, most worryingly, a prospective recession on the horizon.
But what can we expect from a recession, and is there anything we can do to weatherproof our finances against it?
The term ‘recession’ applies to a prolonged period of negative GDP, high levels of unemployment, and low economic activity. How long this period lasts varies from one definition to the next, but it’s generally considered to be a period of two (or more) consecutive quarters.
Recessions tend to be considered an inevitability – a part of the economic life cycle like any other. Of course, in reality, recessions take a considerable toll on large portions of the population; they lead to loss of earnings, limited employment prospects and, in much the same way we’ve witnessed over the last 18 months, a widespread struggle to keep up with the costs of living, such as mortgage interest, energy bills, and supermarket prices.
Periods of prolonged inflation are some of the most common causes for recession, although other factors like sudden economic shock (a Wall Street Crash, for instance) and excessive debt can also precipitate recession.
The average length of a recession is around 10 months, although there are no guarantees against a 2024 recession lasting a lot longer – or reaching a natural conclusion a lot faster.
What Does a Recession Mean for Household finances?
Some households will be far more affected by a recession than others, just as some businesses will grow as others shrink or, in worst-case scenarios, collapse.
The beginning of a recession isn’t the landmark moment many of us expect it to be. Some experts will disagree on whether or not a recession is underway, so think of it more like wading into the sea than jumping into the deep end of a diving pool.
For some households, recession will feel much like the cost-of-living crisis, where the usual sources of income just aren’t enough to cover the standard of living they are used to – or even the basics. For others, rising costs will prove noticeable but manageable. Either way, recession is much more likely to be felt in increments, rather than a single drop from financial stability to instability.
How to prepare your finances for a possible recession
There are plenty of things you can do to ensure that your finances are optimised for the coming months.
Don’t react, respond
A recession doesn’t start with a big bang, so don’t immediately rework your savings, long-term goals, outgoings and incomings just because the headlines are starting to warn of a fresh downturn.
Remember that reacting to the news of a recession isn’t as wise as responding to your own financial circumstances. If making ends meet with your current budget suddenly feels difficult, then, by all means, make a change. But immediately turning everything upside down when you don’t know how much you will be affected by the recession will only present fresh worries, rather than good solutions.
Revisit your outgoings
Most of us will pick up subscriptions and other regular expenses that are no longer necessities – or even luxuries that we no longer want to saddle ourselves with. While many of these costs seem small on their own, it’s easy for a few pounds here and £50 there to accumulate and represent a steady drain on our monthly finances.
This is where the importance of not burying your head in the sand comes in. Pruning the direct debits and outgoings list is an important step for anyone, and it can save a significant portion of money each year.
Avoid letting your money idle in a low-yield savings account
Bank interest rates are lower than the rate of inflation right now. The usual high street names are failing to offer their customers any worthwhile opportunities to let their savings mature in real terms and, as a result, many people are missing out on the opportunity to achieve any real growth on their savings.
Investing your savings elsewhere and creating a diverse portfolio that serves your long-term financial goals and your tolerance for risk is can be an alternative to holding cash. Don’t scramble to invest every spare penny you have – give yourself a buffer, and talk your options through with an independent financial advisor before you make any commitments.
Don’t become a helicopter investor
Hovering over your investments and tracking every small fluctuation in value isn’t good for anyone, and it’s not the key to a successful long-term investment strategy. Recession doesn’t automatically mean that investments are thrown into a spin, and it’s important to remember that inaction is a key part of being a good investor.
We are always here if you want advice on your investments, and talking it through is a far better option than sitting, watching, and biting your nails as the market inevitably fluctuates.