Personal Finance

How Could A Recession Affect Your Finances?

Yellow arrow ponting left for inflation and right for recession

Talk of record high inflation is last month’s problem; now news has turned to the possibility of a recession – the worst since 2008, if the bank of England’s predictions is to be believed.

This all sounds pretty serious, but for those of us who don’t sleep with an economics textbook by the bed it can also be a little confusing. So how would a recession differ from the cost-of-living crisis that’s already causing issues for many households?

In a nutshell, high inflation causes prices (and interest rates) to go up, while a recession means that the economy is shrinking and typically lasts to lower income and redundancies. During periods of high inflation, people find that they have less buying power, as the money they earn is worth less in terms of goods and services. In a recession, prices can still be high but households also find they have less money to spend. This can become a vicious circle, as businesses lose even more customers and have to make more redundancies.

One of the key factors that differentiates a recession from other periods of economic downturn is the length of time it goes on for: months or even years before the economy starts to bounce back. In this case, the Bank of England is predicting that it will take around 15 months before recovery.

Harder to find work

By far the biggest impact of a recession for average households we are likely to see, is a wave of redundancies as companies struggle to stay afloat. Unfortunately, there will also be fewer vacancies, meaning that those people who do lose their jobs – or are recently graduated – will find it harder to get a role. This means that employers can afford to be less competitive in what they offer, with lower salaries and a less generous benefits package.

Financial inequalities widen

The impact of a recession will be felt by employees and business owners alike. However for the very wealthy households that don’t need to rely on regular income to pay their expenses, things are unlikely to change much if at all. This means that existing financial inequalities – already the worst they’ve been for several decades – will get wider, and the people already facing financial difficulties will be at risk of being left behind.

Pressure on the government

How well our country rides out a recession will depend in a big part on what the government decides to do about it. Cutting taxes is one option to stimulate the economy because it puts money back in people’s pockets and therefore encourages them to spend more. That money is then pumped back into business, allowing companies to start growing and thriving again. Unfortunately, this also worsens the effect of inflation, driving prices higher. It also leaves the government with less cash to spend on essential services and benefits. If we do face a recession over the next couple of years, the government will have a lot of difficult decisions to make.

For now, it’s still not certain that we’ll go into a recession. However, with it looking likely it is a good time to get your ducks in a row. Make sure you’re claiming any benefits you’re entitled to, save what you can each month into an easy access high interest account, and start thinking about ways to trim your budget should the need arise. These things can form a protective barrier to stop your family from feeling the full force of any economic trouble.

Related posts
Personal Finance

Protecting Your Finances: Essential Legal Advice For Managing Personal Wealth

DebtPersonal Finance

What Are My Options If I Am In Debt?

InvestingPersonal Finance

Key Differences: Investment Manager VS. Financial Advisor

MortgagesPersonal Finance

10 Different Options If You Miss A Mortgage Payment