The Recession Explained & What It Means For You

If you’re one of the many rattled by the Bank of England’s announcement that the UK will fall into recession later this year, you’re not alone. A cost-of-living crisis coupled with ongoing geopolitical tensions means growth is contracting in the UK – but what does that mean for your finances? We asked Victoria Scholar – Head of Investment at interactive investor and a regular on BBC News, Sky and LBC – to share her insights.
By Harriet Russell /

An economic recession simply refers to a slowdown in growth. It’s technically defined as two consecutive negative quarters of growth, but what it means is there’s less consumer demand for goods and services, businesses might start to struggle and investment – both at home and from abroad – might slow down as well.

The biggest factor that’s led us to this recession is rising inflation. Post-pandemic we saw supply chains which were mostly offline during 2020 and 2021 struggle to catch up. And yet the minute we all emerged from lockdown, we were desperate to get out there and spend our money. Put simply, there just wasn’t enough to go round and demand greatly outstripped supply – for everything from holidays to restaurants and shopping. This imbalance is what sent prices through the roof – an economic trend known as inflation. To cope, the Bank of England has been forced to put interest rates up, as theoretically, this discourages borrowing and encourages saving, but it also tends to slow the economy down.

We’ve also had to cope with geopolitical uncertainty due to the war in Ukraine. Not many people realise that Russia and Ukraine are two of the world’s biggest commodity exporters, so supply of things like oil and gas have come under pressure, as have ‘soft’ commodities like wheat – hence soaring food prices. In short, inflation started post-pandemic, as did the prospect of interest rate rises, but it’s been exacerbated by the situation abroad.

This is not the same situation as 2008. The global financial crisis was driven by a crash in the banking sector on Wall Street, when the banks became overly confident about something called mortgage-backed securities. They packaged up these products – the value of which was based on underlying house prices – and repurposed them to sell them on for a profit. But it soon unravelled, which led to the collapse of Lehman Brothers. This then caused a huge crisis of confidence in the economy and the US Federal Reserve was forced to step in to avert an even bigger disaster. 

In 2020 we purposefully induced a recession to protect our health service. We deliberately shut down the economy to elevate our public health goals i.e. survive the pandemic, and now we’ve come out of lockdown, there have been a series of complications – not least how much the government spent on things like the furlough scheme, track and trace and the vaccine rollout. Billions were spent during the pandemic and spending like that can also be inflationary – so that is partly to blame for the cost-of-living crisis, too.

One thing leads to another. Rising inflation reduces the affordability of goods and services, which in turn causes a cost-of-living crisis and eventually, a contraction in overall growth.

A recession and soaring interest rates are good news for savers, but not borrowers. It’s estimated close to two million people in the UK are on what we call variable-rate or ‘tracker’ mortgages. That means the interest rate on their mortgage debt changes. These people are going to be most affected by yesterday’s announcement because it will increase the sum they pay back every month. Meanwhile, fixed-rate mortgage holders (who agree to pay an interest rate that doesn’t change for a set number of years) approaching the end of their term will be looking at a more expensive mortgage rate going forward. 

To cope with rising INFLATION, the Bank of England has put INTEREST RATES up to discourage BORROWING and encourage SAVING – but it also tends to SLOW the economy down.

That said, we’re not expecting to see a huge jump in mortgage rates. For the most part, the mortgage market has been expecting this, so it will take a lot to shock it. The Bank of England has also loosened rules around mortgage lending, including scrapping affordability tests, to ensure people can still get a mortgage as interest rates continue to rise and offset inflation.

The labour market is in a really unique position. After the pandemic, we had something known as ‘the great resignation’ when a lot of people who were close to retirement decided not to go back to work. Similarly, a lot of young people chose to pursue higher education instead of join the workforce. We also had Brexit, which led to a mass exodus of foreign workers and inhibited a lot more from coming here. As a result, the overall size of the labour market has shrunk massively. 

What this means is employees have never had more power. They have more clout in pay negotiations and can be more aggressive in their demands – which probably accounts for the small rise we’ve already seen in wages this year. Sadly, current wage growth probably won’t be enough to offset the pace of inflation. Inflation is nearly at 10% and wage growth is closer to 3%-4%. In real terms, most people will be taking home less than they were this time last year.

There’s been a lot of volatility in financial markets this year. Share prices have suffered – most notably in the tech sector – so it’s never been more important to take a long-term view. If you’re worried about the value of your investments, try to keep a cool head. Nothing stays the same forever, there are always ups and downs and it’s very difficult to time the market perfectly i.e. sell at the top, buy at the bottom. Try not to let your emotions control your financial decisions this year – I’d tell anyone to ride the wave if they can.

There probably is a bit more pain to come. It will be challenging this year and next, but it’s so important to take the long-term view. Technology is a long-term deflationary force, so any advances in AI or 5G have the potential to offset inflation. In the near term, the one thing that will ease inflation is a de-escalation in geopolitical tensions. We need Russia and Ukraine’s commodity markets to open up again and China to potentially change its zero-Covid policy. Its current approach has spawned multiple lockdowns and contributed to a lot of supply issues we’re now experiencing. As long as the pandemic continues to fade in the rear-view mirror, these supply issues should ease up.

Visit II.co.uk & follow @FinancialVictoria on Instagram

Finally, Emma-Lou Montgomery, Associate Director for Personal Investing at Fidelity International, Shares Three Ways To Recession-Proof Your Finances…

As day-to-day life becomes increasingly expensive, it’s important to take a step back and consider the things you can control. Where you do the weekly food shop, what you spend your money on and how much discretionary spending you can afford will all be totally dependent on your personal budget. There are, however, some simple yet effective tasks everyone can do to see them through these next few rockier months. As always, being aware of day-to-day expenses while keeping an eye on the future is key.

01

Review Where You Shop & What You Buy

Everyone loves a bargain, but with the cost-of-living soaring these have changed from ‘nice to haves’ to something that could make a considerable difference to your bank account. Now is the time to review exactly what you’re spending money on and where the best deals are – whether this is for your mobile phone, broadband, car and/or home insurance, or even your savings. The same attitude should filter across to your weekly/monthly shopping habits. Amid all this financial uncertainty, one of the things you can control is where you shop and what you buy.

02

Protect & Enhance Your Rainy-Day Fund

While the majority of your finances will be ring-fenced to cover the cost of household bills, having a rainy-day fund set aside can help safeguard against unexpected costs. If you can afford to do so, it’s a good idea to start by aiming to save around one month’s worth of income, and work towards scaling up. Recently, more people may have had to dip into these savings to cover surging energy and/or fuel costs, but as long as you keep a record and try to manage how often you do this, then you’ll be able to replenish what was spent over time. Don’t forget to also review whether your savings account is offering you the best rate, as with interest rates going up, so should the rates your bank offers.

03

Be Smart About Your Investments In The Current Climate

During this turbulent time, it’s understandable if you have the urge to pull back on your regular investments. However, it’s important to keep a cool head, avoid knee-jerk reactions, and focus on your long-term goals. Instead, what may give you the best outcome in the long term is adopting a more defensive investment strategy over the coming months. This could mean, for example, holding more in companies that are resilient to downturns, such as consumer staples and pharmaceuticals. A well-balanced portfolio in uncertain times is also important as this will ensure you’re well diversified and can protect your investments against social, political and economic changes.

Visit Fidelity.co.uk

*DISCLAIMER: Anything written by SheerLuxe is not intended to constitute financial advice. The views expressed in this article reflect the opinions of the individuals, not the company. Always consult with an independent financial advisor or expert before making an investment or personal finance decisions.

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