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A country is in recession when the wealth it generates shrinks. They are a regularly occurring and part of most economic cycles. The impact of a recession on everyday life and your ability to pay the bills can be extremely worrying.
Although they are all defined in the same way as two consecutive three monthly periods when the economy shrinks, no two recessions are the same. They all have different causes, different responses from governments and different impacts.
The most recent recession was caused by the Covid-19 pandemic and the restrictions placed on businesses and consumers. Others have been caused by asset price bubbles, structural shifts in the economy and banking crises all the way back through history to poor harvests and Napoleonic wars.
Often after an economic shock, even those who remain in their jobs and have disposable income will become risk averse and rein in their spending, which further reduces the nation’s output.
Although the headline causes may vary, most recessions have several common impacts on our day-to-day lives.
Perhaps the most worrying is an increase in job loss and unemployment. This will happen first to those in industries immediately impacted by a crisis, for example workers in the hospitality industry forced to close during the pandemic. There is then a knock on effect to other industries if these job losses cause wider consumer spending to drop.
Wages may also stop growing as companies attempt to reduce their outgoings, which further tightens the belt of an economy. This can make people think twice about large purchases and prompt them to delay big expenditures.
In some cases a job loss or stagnation in wages, can cause people to struggle to keep up with bills, rent or mortgage repayments. That is why debt problems increase during economically difficult times as do repossessions, which is when a mortgage provider takes ownership of a home when repayments haven’t been made.
One of the largest expenditures people often consider delaying during a recession is buying a home. This can prompt house prices to drop, or at least fail to rise, in a downturn. Although this isn’t always the case and doesn’t happen uniformly across the country.
If you are able to stay in your home, you can wait for the market to recover before selling. However if price drops push you into negative equity — when your mortgage is worth more than your home — and you need to move, you will have to make up the difference. In this situation it is worth considering letting your home until prices rise again.
How a government responds to a recession could also have a big impact on how a downturn affects you. Some governments decide to cut spending on public services and benefits in order to balance the books, others prefer to keep spending to aid recovery.
For example, the financial crisis of 2008 and the following recession, led to austerity. This included policies that capped benefits and led to pay freezes and redundancies in some areas of the public sector. This had a direct impact on people’s financial security. However a steep reduction in interest rates lowered the costs of debt such as mortgages, which reduced the repayments some people had to make.
During the most recent downturn caused by Covid-19 lockdowns, the government introduced the job retention scheme, otherwise known as furlough, and the self employment income support scheme. The aim was to try and save jobs which would still be viable when the economy reopened. Interest rates have also remained historically low, which makes borrowing for a mortgage more affordable.
How well the economy bounces back will determine how many of the furloughed jobs are kept in the long term.
If a recession hits and you find yourself in financial trouble there is help available. Here are some useful steps to take initially:
Selling your home could provide you with much-needed funds to help you through a recession. However, you need to think carefully about whether it is right for you and make sure you have somewhere else to move to.
If you decide to go ahead, we can buy your home in as little as seven days and will keep your costs to a minimum. For example, we don’t use estate agents, so you won’t be charged their commission, and we instruct and pay for solicitors.
We’re always happy to chat about our service and how we can help you, so please get in touch.