The world has been impacted by Covid-19, and many of us are concerned not just about our physical health, but the economic impact too - are we already in a recession or are we headed for one? With so much going on at the moment, it’s difficult to know what the future will look like or what a recession could really mean for each of us and our lives?
With the imposed lockdown forcing all manner of businesses to close or change how they operate, crucial economic activities are on pause. Many retail outlets, restaurants, pubs and hotels have been closed for some time now. Transportation and travel companies are running a minimal service and most people are only venturing out to buy essentials. All of this means people have been spending less, causing a sudden drop in Gross Domestic Product (‘GDP’ refers to the total value of all the goods and services sold in the country during a specific period of time), resulting in a potential recession.
In simple terms, a recession is when the economy shrinks over two 3-month periods. This means it could take some time before we know whether we're already in the middle of one. In the meantime, how you could be affected is quite complex and depends on your individual circumstances. We’ve summarised the areas of the economy which are likely to be impacted so that you can be better prepared by assessing how each one relates to your personal situation.
Not everyone is affected in the same way, and some of us have been able to work from home, while others have been put on furlough by their companies. However, as companies are likely to need to reduce costs, not all businesses will reopen as normal once lockdown eases. As a result, not all employees will be guaranteed to get their jobs back, and those that do may find themselves with reduced working hours, some changes to how their jobs work or potentially find themselves facing redundancy. NIESR predicts that unemployment will rise by around 1.5 million this year.
Although it’s not something we enjoy thinking about, we need to be prepared for the possibility of a loss or reduction of income. Focus on the things that you could do and control now - it could mean thinking about additional ways to make money - could you set up a side gig? - updating your CV, learning new skills or obtaining a qualification to make yourself more valuable to your current or a new employer, or being ready to transition to a new line of work if necessary.
Cost of living
Generally speaking, when a country goes through a recession, it can have the effect of reducing wages because more people are looking for jobs. This could mean that your wages don’t increase in line with inflation (for example, the price of a loaf of bread might increase but your salary remains the same, so your purchasing power has decreased - you can buy less with the same amount of money). To prepare for any impact, it’s worth reviewing your spending and aim to see if there are any areas you can cut back on. The first thing to do is to look for savings on your core living costs like mortgage, utilities, insurance and mobile phone contracts. To help you get started, click here to download our Smart Spending Planner.
It’s also important for you to still find ways to have some fun, as life doesn’t need to be about going without. Coming out of lockdown could be our opportunity to get more creative with how we socialise. This could mean choosing to picnic or BBQ with friends over dining out at an expensive restaurant, or planning a relaxing staycation rather than going abroad on holiday.
House prices are linked to how the economy is doing - when the economy slows down, house prices usually slow, stall or fall. This is because higher unemployment and higher job insecurity typically reduces demand from buyers. Whether residential property is a safe investment during an economic downturn is anyone’s guess. However, what is for certain is that the Bank of England has cut interest rates, meaning borrowing costs have reduced and mortgages are generally more affordable.
How long will this last?
It is important to note that recessions aren’t forever and although the impact might be felt for a significant amount of time, once the lockdown rules are eased, the economy should start to pick up steam. According to the Bank of England, “the downturn is expected to be short and sharp.” Many businesses are already planning their re-openings which are expected to start from 4 July, which will mean many activities will be possible again, albeit with social distancing measures.
What can I do?
It might be tempting to avoid thinking about how things are changing and the impact a recession could have on you personally, but it’s far better to prepare how you might react if we remain in tough economic times, so you can be ready for potential financial shocks and reduce the negative impact of a recession.
Remember that recoveries always come after a downturn, so don’t lose hope! The government has put significant financial measures in place to support jobs, incomes and livelihoods..
For top tips to take action with your finances in these turbulent times, read our recession checklist here.
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