Are we heading for a recession?

As the UK’s cost of living crisis rumbles on, it seems increasingly likely that a recession is looming. But just how likely is it? And what would it mean for our lives and savings?

In this article, we’ll take a look at what a recession would mean for the UK today.

What is a recession?

First, a quick definition. What actually is a recession? In economic terms, the definition is fairly straightforward: a recession is two financial quarters of GDP decline in a row. Here’s what that means. Essentially, a recession is an extended period (a minimum of a few months) of low economic activity. This is usually felt across:

• The cost of goods and services
• Income levels
• Public spending
• Employment

Generally, the economic output of the UK (and the rest of the world) grows each year. This is measured by our GDP - the value of goods and services we produce versus the goods and services we buy.

A healthy, growing economy is where UK businesses are widely successful - where people can find work, earn a good income and buy things they want and need.

A recession comes about when GDP falls. This means there are fewer jobs available, lower incomes and people have to be more careful with their money.

While the UK’s economy tends to grow each year, in the past certain events have triggered an economic downturn. Let’s take a look at what this meant.

A recession is two financial quarters of GDP decline in a row.

Past recessions

The last major, long-term recession in the UK was back in 2008. This was part of a larger financial crisis, caused by a widespread crash in the housing market, as well as rising energy prices. It was the deepest recession the UK had faced since the Second World War. The effects were widespread and long-lasting.

• Unemployment rose to 10%
• The economy didn’t recover for 5 years
• Earnings have stayed below prices ever since

Source: Office for National Statistics

Of course, it’s important to remember that no recession is quite the same. Any economic downturn the UK may face in the coming months will likely look very different to the 2008 recession. It’s also vital to note that the economy did recover - highlighting how, in order to prosper, we need to set financial goals for the short, medium and long-term.

Gross Domestic Product (GDP) is the value of goods and services we produce versus the goods and services we buy.

How does a recession affect my pension?

You may also be thinking about how a recession might impact your future, particularly if you’re close to retirement. What happens to pensions in a recession is broadly in line with what’s happening with financial markets as a whole.

If you weren’t already aware, everything you pay into your pension is invested into something called a pension fund. A pension fund is a big collection of pension savings that invests in a wide variety of financial assets, such as:

• Stocks and shares
• Government bonds
• Commodities like precious metals
• Overseas investments
• Property

Generally speaking, your money will be diversified - spread across a broad range of these investments. When the economy is struggling, the value of these investments tends to dip as well - potentially impacting the value of your savings.

If you still have a few years before retiring (i.e. more than 5), you shouldn’t panic. Your savings will have plenty of time to recover. In fact, if you can, continuing to pay into your pension when market prices are lower means you may benefit when the market eventually bounces back.

For those very close to retirement, you may have to act a little sooner. It might be wise to consider:

• Moving to a pension fund comprising of less volatile investments like government bonds (if you haven’t already)
• Drawing income from other sources for the short-term
• Pushing back when you start accessing your pension

Of course, you should always speak to a financial advisor before making a firm decision.

Is the UK heading for a recession?

In the past, recessions have arisen when people become concerned about the economy and stop spending. Many of these same signs can be seen in the UK in 2022.

Rising energy costs and the cost of living crisis have already led to many Britons tightening the purse strings and with further rises to energy bills coming in the Winter, many are predicting a recession is on the way.

Of course, no one can predict the future and we may yet avoid a full recession. One thing we can’t predict right now is how long or severe any potential recession might be.

For example, the UK also dipped into a recession during the onset of the Covid pandemic, although it recovered in a couple of months.

If you’re worried about the future of the economy and its impact on you you can act now. You can consider:

• Make a budget and reassess any short-term goals
• Clearing any high-interest debt
• Preparing an emergency fund