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Recession meaning: how does a recession affect me?

Recession meaning: how does a recession affect me?
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The UK is officially in a recession. ONS figures show that the UK economy contracted by 20.4% between April and June 2020. This followed a 2.2% slump between January and March, meaning that the value of goods and services has fallen for a total period of six months. But how have we found ourselves here? And what is the meaning of a recession?

We’re here to guide you through why we are in a recession, what happens now and how it could affect you.

Why is the UK in recession?

To answer this question, you need to know what a recession is. A recession is a period of reduced economic activity. And the UK and the EU define it as a two or more quarters of a contraction in national gross domestic product (GDP). GDP is essentially the monetary value attached to manufactured goods and services produced in a country.

The UK is currently in a recession largely due to the lockdown measures put in place because of the coronavirus pandemic. The period with the sharpest contraction occurred during lockdown. This meant that economic activity in the country plummeted, and GDP fell sharply as a result.

The silver lining is that as lockdown eases and economic activity returns, we will see an improvement in GDP growth. However, the ongoing uncertainty surrounding Brexit negotiations could mean that the UK’s recovery is slower than some other advanced economies around the world.

What is the meaning of a recession for me?

It is very easy to read the news headlines without fully understanding what is happening. But what is the real meaning of a recession? And how can it affect you?

Unemployment rises

The real meaning of a recession is rising levels of unemployment. As costs rise and companies struggle to stay profitable, you will find many making redundancies. In fact, at the time of writing, several big names in the UK have already announced job losses.

It’s not only an increase in the number of job losses, but probably a hiring freeze from many companies as well. This means that if you are made redundant, you could struggle to find a new job. Or if you are a school leaver or new graduate, you will find it difficult to secure your first role. So people find themselves being unemployed for longer periods of time during a recession.

All of this means that household incomes are affected. So there is less discretionary spending, and some households may struggle with rising levels of debt.

Wages stagnate

The squeeze on businesses in a recession means that wages are likely to stay still. This means no pay rises, and you could find it harder to get a promotion. Also, companies are unlikely to pay full bonuses, or, in some cases, any bonuses at all.

House prices fall

Another significant impact of a recession is that the housing prices usually fall. If you are trying to sell your house, you may find it difficult to find a buyer. Or if you are remortgaging, you may find that the value on your property has gone down. This, in turn, could affect your level of equity and what loan-to-value (LTV) you can secure on a mortgage.

Lending conditions tighten

You may also find that lending conditions tighten during a recession. With an increase in unemployment, banks become more cautious about how much they are willing to lend, and to whom.

Already in 2020 there has been a reduction in the number of 95% LTV mortgages available. And unless you have a squeaky clean credit score, you may find it hard to get yourself a credit card or loan.

What does a recession mean for investors?

If you are looking to invest, a recession could actually help grow your wealth in the long term. But there are some dos and don’ts to investing during a recession.

As a basic rule, you should only consider investing during a time of economic uncertainty if you have a healthy emergency fund. This should be enough to cover three to six months of living costs to support you if you did lose your job.

If you have an emergency fund in place and feel confident that your job is secure, then buying shares during a recession could actually help you to increase your wealth. When investing in a recession, you need to consider what type of shares you are buying. For example, invest in utility sectors or industries that are less likely to be impacted.

The main thing is to avoid getting spooked and selling your assets off too early. No two recessions are the same, so you need to have a long runway before you require access to your investments. If you can sit tight and wait it out, you will likely find that the cyclical nature of investing means that the market will improve again and your shares will increase in value.

Obviously, this depends where you are in your investment lifecycle as to whether you can sit it out. To find out more about investment lifecycles, take a look at our article on investment lifecycles and what the next recession could mean for you.

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