It’s not news that today, figures reveal the UK is officially in recession for the first time in 11 years. This comes following yesterday’s news that 730,000 British people lost their jobs between March and July this year (struggling with coming to terms with your job loss? We asked the experts for their best advice).
Sure, you know that the term ‘recession’ has negative connotations and generally means the economy is in trouble. But beyond that, do you know how it might affect you and the wider community? Not just now, but in the years and months to come?
Marie Claire spoke to the financial experts to get their take. Here’s what you need to be doing to protect yourself (and your finances).
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What is a recession?
Kara Gammell, founder of money-saving blog yourbestfriendsguidetocash.co.uk, shares: “a recession is defined as two consecutive quarters of economic decline”. Tom Martin, Chip money expert, expands: “To put it simply, it’s where the country as a whole is producing and spending less month on month, for more than half the year.” Bottom line: a recession occurs when a country’s economy shrinks over a sustained period of time, rather than growing normally.
Wondering how on earth they work something like that out? Kara explains that it’s calculated using something called Gross Domestic Product (GDP). In the UK, this is the value of all the goods and services added up in pounds.
Why is a recession bad news?
Generally speaking, recessions lead to unemployment and wage stagnation. Stats indicate that one in three businesses could cut jobs by October and those in jobs could go several years without pay rises.
“This means that the government gets less tax and to compensate for the loss, will in turn cut services and benefits or increase rates”, Kara shares.
You may have feared this when COVID-19 first made headline news in the UK back in March. In many ways, this recession simply confirms those fears. It demonstrates what can happen when a global pandemic disrupts the world and the way people work.
What does the recession mean for me?
Other than the obvious—from job losses to shop closures— there are a few ways it can play out, according to Tom.
“Depending on the situation, the government generally reacts by injecting cash into the economy”, he says. Think the furlough and the Eat Out to Help Out schemes.
Alongside that, he shares that, generally, interest rates are lowered, too, saying: “borrowing gets cheaper, but decent savings rates are hard to come by”.
What about for this particular COVID recession? “Both of these trends are likely to continue unless we start to see runaway inflation (where prices increase) when the government would ease up their spending policies”, Tom reckons.
What can you do to protect yourself from the recession?
Yes, the current climate can feel overwhelming, but remember: you are not alone. Let Kara’s top tips for protecting yourself ease your anxiety.
1. Create a budget
Carefully look through bank and credit card statements to see exactly where your money is being spent. Many of us overlook the little extras that can send a more balanced budget into the red. Once you know where you stand financially, it will be easier to make sure all your outgoings are covered and you are able to siphon off money into a savings pot
To do this, check out Money Saving Expert’s free downloadable spreadsheet which allows you to detail all your income and outgoings.
Here you enter all your expenses, whether they are weekly, monthly, or annually and the clever spreadsheet does all the sums for you.
What’s more, it is a great time to have a look at any bills that you might be able to reduce.
Once you know where your money is coming from, how much there is, and where it is all going, you might find that you have some extra cash to pop into savings.
2. Get rid of unwanted payments
Two-fifths of us continue to pay for subscriptions we don’t use worth £21 a month, according to research by Topcashback.co.uk.
Now is a good time to take a fresh and thorough look at your bank statements, highlighting any direct debits leaving your account you’re unaware of, or subscriptions you no longer require.
This could be anything from gym memberships to magazine subscriptions – or for parents who panic registered for ‘free’ trials for Disney+ and Twinkle Learning Resources during the start of lockdown, many of these will expire and you’re being charged without realising.
By cleaning up the unwanted subscriptions, no matter how small, you could keep extra pennies in your pocket.
3. Build an emergency fund
If you have any money to spare, now would be a good time to think about starting an emergency fund.
Figures from Legal & General show that the average person would only be able to survive 32 days should their income drop, so having a back-up plan is crucial.
This emergency fund should be able to keep you going for between three to six months, according to Kara.
Keep it in a separate instant access savings account and only dip into it when you absolutely need to get your hands on cash.
4. Cut the cost of credit
If you have hefty credit card debt, make sure you aren’t forking out more money on interest than necessary.
Figures from Moneycomms show that those with a credit card balance of £2,000 and who repay just the bare minimum amount each month, would take 22 years to clear the balance – paying an extra £2,275 in interest in doing so.
Avoid these charges altogether and to move your debt to an interest-free credit card.
Before you make an application, check your eligibility with the soft-search tool from the Money Saving Expert site.
A soft search lets you check what credit deals you’re most eligible for without affecting your credit score. The search it leaves on your credit file can’t be seen by lenders, so won’t affect their decision. This can stop you from applying for the wrong products and harming your credit record in the process.
Opt for the card with the lowest transfer fee for the period in which you are certain you can repay. Before getting a card with a fee, work out if you could clear the debt faster to avoid it. If you’re uncertain, play safe and go for a longer-term – after all, a transfer fee is better than paying higher interest later.
But once the debt has been moved, don’t get complacent, ensure that you then pay it off in full before the interest-free balance transfer period ends.
5. Spend smarter when socialising
If there is room in your budget for fun, make sure that you make the most of the hospitality sector’s reduction in VAT at the weekends.
The government introduced a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions.
This cut in the VAT rate from the standard rate of 20% will be in effect until 12 January 2021.
What’s more, thanks to the Eat Out to Help Out scheme launched by the government, you can get 50% off at participating restaurants in August on Mondays to Wednesdays.
Bear in mind that this does not apply to takeaways, there is a maximum discount of £10 per diner and only includes food. Also, alcohol does not count – but there is no limit on how many times you can use it per day.
What’s more, some restaurants will also allow you to combine it with existing offers and vouchers. Pizza Express and Wetherspoon’s have both confirmed they will allow this.
Ready? Set? Save.