Pressure is building on households in Britain. The cost of living crisis looms large and low interest rates mean that the value of our money is falling fast.
Many people can still feel the lingering effect of the Covid recession of 2020, but so far the British economy has staged a remarkable “V-shaped” recovery. Experts think the country is on track to outpace every other nation in the G7 for the second consecutive year in 2022.
But lingering Covid uncertainty means that persistent growth is not a guarantee. The UK’s economy grew by 7.5pc overall in 2021, but this included a 0.2pc contraction in December.
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 well from the pandemic-induced recession last year. The Office for National Statistics revealed that GDP shrank by 0.2pc in December. However, GDP for the final three months of the year was 1pc higher than the previous quarter.
Given a recession means two periods of GDP drops, this looks unlikely for now.
How to protect your money during a recession
Pay off debt and build up cash
All economies go through natural cycles of expansion and recession. In the event of the latter, 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 organize 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 to buy 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.