What is a Recession?
We all know that 2020 has been a bust in so many ways it is hard to keep track. The beginning of 2020, with the arrival of a lesser-known virus we have all grown to hate, brought about a huge dip in the stock market. Since then, the market has managed to claw its way back somewhat, but the damage is done, and the R word is on every page of the financial press.
Rugby? Roulette? Russia? Fun subjects to write about but sadly not the subject of this article. Recession is the dirty word on every journalist’s lips, but what is it and what does it mean on a personal level?
In a nutshell, a recession is a significant decline of economic activity which effectively means that consumers and businesses spend less money.
Economic activity is typically measured by gross domestic product (the words behind the acronym GDP). This is the total value in £ of all goods and services produced by an economy such as the UK over a specific time period.
When that total value increases (and by implication we, on average, get richer), the economy is said to be growing, and when the value of goods and services declines (and we are getting poorer), the economy is shrinking or, as economists like to call it, negative growth.
While recessions are unpleasant and often alarming, they are a normal part of modern financial life. This is meant to reassure you as the next part won’t. 2020 is officially the 8th recession since the end of WW2, with our economy down by -22.6% by the end of the first 6 months. This was the lockdown effect, bringing us to our knees. Shopping centres closed, entire businesses were wiped out, and basically, if you weren’t in food retail, health or other “essential” services, the world of commerce stopped turning on its axis.
The good news is that by May, the UK economy had already started to improve, surging in June with the GDP rising by 8.7%, and then again in July with +6.6%. However, the damage of Covid has not yet been remedied and as infections start to rise again, there is a very real fear that this positive turn could simply peter out.
Increased Social Inequality
Recessions are destructive and the pain they cause is typically not spread equally across society. Unemployment rates go up, people’s purchasing power goes down, businesses go bankrupt and social inequality increases. The result is people defaulting on their mortgage payments and fewer jobs for our school/university leavers. The flip side, the only good thing about a recession, is that it stops inflation in its tracks.
Higher Unemployment Rates
By the end of the first half of this year, UK employment was down by 220,000. The furlough scheme protected the jobs of almost 10 million people and over 1 million businesses, but there are fears that unemployment will spike further. 23% of employers are said to be considering headcount reductions.
Harder to get credit
Despite low interest rates, it is becoming harder to get credit as lenders are tightening criteria for borrowers. If you are self-employed or hoping to get on the first rung of the property ladder, you may find it harder to find the financial products you need (mortgages, credit cards, etc.).
On the positive side, fewer outgoings linked to closed restaurants and cinemas (etc.) have meant that more people have been able to save. The only problem is that theses squirrels are not likely to see much return on their savings as interest rates fell to a record low in March. In fact, the Bank of England has evoked the spectre of Negative Interest Rates for the first time ever, which would be catastrophic for savers - read more about this here.
Is there an end in sight?
The good news is that the recession is like a wheel. We are expecting a massive downturn at the moment, but, inevitably, the wheel will turn and we will rise again. Some experts even predict that this recession could be the shortest in history, corroborated by economic data post the 2nd quarter drop.
With the country having gone into another national lockdown, there is cause for concern about our economic security. Now is a good time, therefore, to take stock of your individual financial planning.
In the following modules, we'll take a more in-depth look at this current recession, and explore if and how it is different to "normal" recessions.