As we make our way through 2023, times remain uncertain, and a recession looks like it could be on the horizon in the UK. Understanding a recession’s potential impacts is crucial, as it can affect various aspects of our lives, from employment and personal finances to the housing market and consumer spending. In this article, we will answer the question, ‘How would a recession affect the average UK citizen?’ by examining the current economic climate and discussing the consequences a recession could have.
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What is a Recession?
Before we delve into the effects, let’s clarify what a recession actually means. A recession is typically defined as a significant decline in economic activity, often characterised by a drop in gross domestic product (GDP) over two consecutive quarters. It signifies a slowdown in various sectors, including manufacturing, trade, and employment. Several factors contribute to a recession, such as reduced consumer spending, declining business investments, and unfavourable global economic conditions.
Is the UK in Recession?
Now, let’s turn our attention to the current economic state of the UK. While we cannot predict the future with absolute certainty, we can analyse the available indicators and expert opinions to assess the likelihood of a recession. As of now, the UK is not officially in a recession. However, certain factors suggest that a recession may be looming on the horizon.
The Bank of England’s increase of the base interest rate to 5% has set the stage for borrowing costs to skyrocket, meaning that it will be much harder for people to take out mortgages or loans. The Guardian states that economists have predicted the Bank of England could be forced to drive the UK’s economy into a recession to deal with the level of inflation, which is currently at 8.7%.
Economists at Bloomberg have predicted that if the Bank of England pushes its benchmark lending rate to 6%, the UK could tip into a shallow recession, with the country’s GDP predicted to shrink by 1.4% in 2024. Several indicators of recession, such as sluggish economic growth, stagnating wages, and high levels of household debt, are already raising concerns about the current state of the UK’s economy. Additionally, external factors such as the Russia-Ukraine War have affected us in the UK, as they have a knock-on effect on the inflation of energy and food prices. While experts will continue to provide various forecasts and opinions, it’s essential to remain cautious and stay informed about the evolving economic landscape.
The Impact of a Recession on the Average UK Citizen
Employment and Job Security
During a recession, there is an unfortunate correlation between economic downturn and rising unemployment rates. As companies face the impact of slowing demand for their goods and services, they often resort to hiring fewer people and making redundancies to manage their losses. This cycle of rising unemployment and recession often reinforce each other, creating a challenging environment where people who have been made redundant have less disposable income to contribute back to the economy.
In the case of a recession, job losses become a high concern, leading to wage stagnation and heightened job insecurity. The unfortunate truth is that recessions can have a profound effect on employment, causing ripple effects that have the potential to impact the citizens of the UK and the overall economy.
For the average person, personal finances can take a big hit during a recession. This is mainly due to the rising cost of living paired with reduced household income, which can make it difficult to keep up with essential expenses and financial obligations. This could be especially difficult for people who have been made redundant or had their working hours cut by companies to cope with the economic downturn. These people may experience a significant strain on their financial well-being. In this situation, it’s crucial to reassess financial priorities, create a budget, and get some financial advice if you’re struggling.
In times of recession, it is common for property values to decline, which can make it harder to sell or refinance homes. As highlighted by property website Zoopla, the current market conditions have already led to 2 in 5 buyers negotiating discounts of 5% or more off of the seller’s initial asking price.
Moreover, obtaining a mortgage during a recession can become more difficult. Rising interest rates may make mortgages unaffordable for many people, further restricting their ability to enter the property market or secure favourable financing terms. To navigate these circumstances, it is essential to stay informed about the housing market trends, seek professional advice, and carefully assess the financial implications before making any significant decisions related to property.
Consumer Spending and Lifestyle
Recessions have a direct impact on consumer spending habits. With a decrease in disposable income, people tend to cut back on non-essential purchases and focus on essential goods and services. This shift in consumer behaviour affects various industries, such as retail, hospitality, and entertainment. As a result, leisure activities and entertainment choices may change, with people seeking more cost-effective alternatives.
3 Ways to Cope With A Recession
01. Budgeting and Financial Planning:
Creating a budget can be helpful during a recession. By assessing income and expenses, you can identify areas to save money. You can start by listing all of your income sources and categorising your expenses. Then choose some areas of non-essential spending that you could cut back on to stay within your budget or find some cost-effective alternatives. It could also be a good idea to build an emergency fund if you can, which could help to ensure your financial stability during uncertain times.
02. Enhancing Employability:
During a recession, it could be a good idea to enhance employability and explore alternative job prospects. Consider upskilling or retraining opportunities that could help you to stay competitive in the job market. Keeping an eye on emerging job roles that are more resilient to economic downturns could also provide you with an advantage.
03. Protecting Personal Finances:
Protecting your personal finances becomes even more important during a recession. Managing debt and avoiding excessive borrowing can help maintain financial stability. It’s also worth exploring government support programs that may be able to help you during challenging times.
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