A few days ago, news broke that the UK has dipped into the first recession in 11 years. Did you have to Google it? You’re not alone.
We’ve unpacked what exactly is a recession
A recession is where the economy sees negative growth rates for two quarters. Or to put it simply, it’s where the country as a whole is producing and spending less month on month, for more than half the year.
Everyone was concerned this would be the end result back when Covid-19 first stormed into the world in January 2020.
In many ways, this is simply confirming what everyone feared would be the result of the unprecedented disruption of a global pandemic.
It was something we anticipated at Chip back in March, when we highlighted the importance of building up a safety net.
Other than the obvious doom and gloom (job losses, shop closures etc.) there’s a few ways it can play out.
Depending on the situation, the government generally reacts by injecting cash into the economy. We’ve seen this with the furlough and the Eat Out to Help Out schemes.
Generally interest rates are lowered. This means borrowing gets cheaper, but decent savings rates are hard to come by.
For the covid recession, both of these trends are likely to continue, unless we start to see runaway inflation (where prices increase), when the government would ease up their spending policies.
I’d imagine most of us remember the last one, the 2008 recession, often referred to as the Great Recession. It was famously caused by a mixture of risky lending and banks hiding and repackaging these debts. The fallout from 2008 defined much of the last decade.
But there were a few others in living memory, notably the 2002 dot-com bubble and 1992’s Black Wednesday. The 1980s were characterised by a number of boom and bust years, but you’d have to go back to the 1970s to find any recessions almost as big as the 2008 one.
But really the only recession that matches 2008 was the 1930s Great Depression. Whether the Covid Recession will match this rogues’ gallery of big recessions, remains to be seen. But many experts remain hopeful the economy will bounce back as soon as either a vaccine is deployed, or the disease winds down.
The jobs market will likely be tough, but this can depend on your skills, experience and industry.
Some jobs are usually pretty recession proof, whereas others are much more sensitive. If you can, consider the bigger picture, think what industries are growing and what skills will be in demand. The UK’s tech industry will likely continue to grow with digital jobs becoming ever more important.
Recessions usually trigger big changes to society and economy.
For example, the oil crisis of 1973 ultimately resulted in a major restructuring of traditional industrial jobs, which saw many more women enter the workforce and the eventual dominance of the service industry in the UK.
The dotcom bubble of 2002 was the catalyst for tech giants like Amazon to emerge from the fallout.
In this case, Covid-19 and lockdown is acting as a spark that’ll likely accelerate some big changes that were already underway.
For better or worse, much more of our life is going to become digital, as shopping in person increasingly moves online. In our industry, we expect to see more people using apps to manage their money and banking branches to gradually become less important versus mobile tech.
Again, it’ll be very important to make sure your money is in order. I’m sure many of you will be familiar with the common wisdom on how to prioritise your finances;
Of course, life isn't this simple and it can be hard to have any money at all put aside, let alone two months’ salary. And millions of people in the UK have less than £100 saved up, which leaves them exposed to financial shocks, like needing to take two weeks off work.
But we’ve found that the average Chip saver can put aside around £1,800 a year, without noticing it. Which can be a very useful amount of money if you find yourself in a pinch.
But fundamentally, whilst recessions are scary, they also represent times of change and opportunity. If you’re smart (and lucky… never underestimate luck) this could be a great opportunity to switch up your life direction.
Remember your Capital is at Risk and past performance is not a reliable guide to future returns. The value of your investment can go down as well as up and you might get back less than you originally invested.