What is a recession?

In mid April, the International Monetary Fund (IMF) wrote, “…both advanced economies and emerging market and developing economies are in recession.”

That sounds bad, but what exactly is a recession and what should we expect?

What is a recession?

It depends: different groups can’t agree on what a recession is.

Economists say a recession is any period of reduced economic activity.

The UK and the EU, however, say a recession is two or more consecutive quarters (i.e. six months) of contraction in the national gross domestic product (GDP). GDP is the total monetary value of the manufactured goods and services produced in a country in a particular time period. It’s one of the most common measures of countries’ economic health.

For those in the USA, a recession is a significant decline in economic activity spread across the market, lasting more than a few months.

This means the USA will officially be in recession before the UK, but that’s small comfort given that economists say we’re already in a recession.

What is going to happen in a recession?

Employment

YouGov says that one in twenty Britons have already lost a job thanks to COVID-19. As the economy declines, we can expect high unemployment, low job security and poor job prospects. Youth are likely to be badly affected.

Housing

House prices will probably fall, but you may have more trouble getting a mortgage. If you decide to sell, it may be more difficult to find a buyer.

There’s no clear pattern for what happens with rents. Historically, they’ve gone up in some places and down in others.

Debt, borrowing and saving

According to Investopedia, interest rates for borrowers tend to rise at the beginning of a recession. When the Bank of England drops the base rate (the interest rate banks charge borrowers) to encourage spending, rates should fall. Unfortunately, this means that savings interest rates also drop.

Investment

If you’ve been following the stock market, you’ve already noticed the drop in share prices. It’s good news if you can afford to invest, but if you’re close to retirement it’s probably alarming.

Don’t forget that when share prices drop, selling will lock in your losses. If you can afford it, think about holding on.

Food prices

Unfortunately, prices tend to stay the same or go up slightly during a recession. ThoughtCo has a great explanation of why deflation doesn’t happen during a recession.

Wages

Wages will probably drop, as there’s more supply than demand in the job market.

What can you do to prepare for a recession?

Individuals

If you’re an individual, you can take simple steps to improve your financial health:

• prepare a budget;

• reduce your spending, e.g. by creating a food budget; 

• diversify your income;

• reduce your debt;

• save extra cash;

• improve your job skills;

• update your CV; and

• seek help if you need it.

Businesses

The same basic principles of financial health apply to businesses as to individuals:

• improve your cash flow and cash reserves;

• reduce your expenses and debt;

• minimise your inventory;

• focus on retaining your current customers, but don’t cut back on marketing; and

• ensure you have a system for tracking and collecting payments.

Takeaway

We know what a recession is, and we’re probably in one. But remember: recessions are normal; it’s not the first, it won’t be the last, and it could even be an opportunity to improve your financial health or work towards further qualifications.