Will there be a recession? How to protect your finances

The pressure is mounting on the British economy. The the cost of living is rising in low interest rates means that the value of our money is falling rapidly.

British companies initially thrived when locking restrictions were lifted, but that could be shaky now. Economic growth has slowed sharply in the last quarter, and analysts predict that the possibility of a recession has begun to creep in.

A recession can have a devastating effect on people’s daily finances, as a weaker economy usually means wages falling and layoffs rising. Telegraph Money explains what a recession is and how you can protect your money from negative effects.

What is a recession?

When a country operates smoothly, the value of the goods and services it produces grows – its gross domestic product.

But in times of economic recession, that value falls. A recession is when GDP falls 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 from last year’s recession caused by the pandemic, but it is starting to slow down. Last month, the Office for National Statistics revealed that Britain’s recovery rate was lagging behind the rest of the G7, as supply chain disruptions and cautious spending levels affected businesses.

The economy grew by only 1.3 percent in the third quarter of the year, lack of expectations and marked a sharp slowdown from 5.5% growth in the second quarter. The British economy is still 2.1 percent below the size before the pandemic.

Analysts at research firm Gavekal have already raised the alarm for the recession. The report said that “supply chain problems and energy shortages are likely to worsen in the coming months, pushing the pound lower”.

The company added: “The combination of the fight against inflation in a time of high energy prices means that the UK economy is likely to face a recession in 2022.”

How to protect your money during a recession

Repay the debt and get the money

First, try to pay off any expensive debts you may have, such as credit cards. If you have multiple debts, first consider a loan with the highest interest rate, and then move on to the next one.

If you don’t have enough money to pay off the debt, check to see if you can move to a lower rate. This may offer only some temporary relief, but it will give you more time to organize your finances and prevent your debt from growing so quickly.

If you have money left, try building an emergency cash fund as well. This can protect you from possible unexpected bills or even help you cope with a period of unemployment. A good rule of thumb is to defer three to six months of your average expenses.

Continue investing in the long run

Although a recession often hampers people’s finances, it can also be a good investment opportunity. However, only consider this if you already have a healthy emergency fund and are happy with the possibility of losing money.

Jason Hollands, a stockbroker at Bestinvest, said: “While recessions are undoubtedly painful for the real economy, they are increasingly promoting a range of measures that end up being very positive for investors.”

The recession requires a more “defensive” investment style, which means choosing stocks and funds that are usually resilient at all points of the economic cycle.

Mr Hollands pointed to the consumer basic products sector. While consumption usually falls during periods of recession, everyday items such as toilet paper and tea bags rarely suffer.

“This category would include stocks such as Unilever, Reckitt Benckiser and Procter & Gamble, each of which owns a wide range of household brands,” he said.