How can I prepare for a recession?

How can I prepare for a recession?

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Wealth Solutions in our Edgbaston or Warwick offices.

Should the UK government focus on growing the economy (potentially pushing inflation beyond 9%), or concentrate on bringing inflation under control? The two are difficult to achieve at the same time. With households across the country feeling the pinch in 2022, the government is likely to face pressure to pile its efforts onto the former. This is fuelling fears that the UK could be slipping into a recession – at precisely the time when costs are rising, which could lead to a “stagflation” scenario.

Yet, how likely is this outcome? What would the impact be on jobs and households? Is there a way to prepare for such a scenario with your financial plan? Below, our team at Wealth Solutions offers some reflections. We hope this is helpful to you. If you’d like to speak to an independent financial adviser then you can reach us via:

T: Edgbaston 0121 446 5815
T: Warwick 01926 888091
E: [email protected]

Is stagflation coming to the UK?

Stagflation attempts to describe a unique possible scenario in the UK economy. That is, high inflation and negative/slow economic growth (characterised by high unemployment).

With economic forecasting, nothing is certain. We can only make educated guesses about what may happen in 2022. At present, the Bank of England (BoE) and Organisation for Economic Cooperation & Development (OECD) believe that high inflation will not start coming under control until 2023. Growth forecasts are still fairly positive, with the BCC (British Chambers of Commerce) predicting 3.5% growth for 2022.

In April 2022, however, the UK economy shrank by 0.3%. This is a second fall in GDP (gross domestic product) after a 0.1% fall in March, suggesting that the UK is entering a recession. However, UK policy manoeuvring and more favourable global conditions could help to avoid it.

What does UK stagflation mean for me?

Even if stagflation transpires in 2022, it is important not to panic. Remember that recession is part and parcel of the economic cycle and does not necessarily mean personal disaster. The last time the UK endured recession was between 2008 and 2009 (the Global Financial Crisis) and, although difficult for many, we got through it.

Two possible negative outcomes from a possible recession could be rising unemployment and falling house prices. The latter is, naturally, bad for homeowners looking to increase their equity, but good for first time buyers looking to get on the property ladder. Nonetheless, households are likely to face pressure if 9% inflation continues in 2022; with interest rates continuing to rise to try and control it. Higher inflation means that your monthly expenses are likely to rise (e.g. fuel and food shopping); rising interest rates could potentially translate into a more expensive mortgage repayment for those on a variable rate, or for those with a fixed deal coming up for renewal soon.

How can I prepare my finances for a recession?

A high priority should be ensuring a healthy level of emergency savings in an easy-access cash savings account. Here, a good guideline is 3-6 months’ worth of living costs. This can help tide you over if you lose your job, a major home repair comes up or you need to attend to a family emergency. However, be careful not to stockpile too much in cash. Remember, with inflation at 9% in 2022, the value of cash will be eroded heavily due to poor interest rates.

It is also a good idea to review your protection plan. Policies such as income protection and critical illness cover can provide valuable financial support if you find yourself unable to work due to severe illness or injury. Life insurance is important if you have a mortgage still to repay; especially if you have dependents or a partner/spouse who would need to deal with the debt if you die prematurely.

Homeowners would do well to prepare for possible future rises in their mortgage repayments (i.e. if interest rates continue to rise). Make sure you have a healthy gap between your monthly income and expenses so you can manage this. Bear in mind that, if the BoE base rate goes up to 1.5%, then it could add an average of £129 to monthly repayments. Those with a mortgage may wish to consult a professional about getting a fixed rate deal now. This could help protect you from further mortgage costs if interest rates rise further.

Everyone – including renters – should also brace for further rises to their energy outgoings. The UK’s energy regulator, Ofgem, has announced that the annual price cap is set to rise to around £2,800 in October. This would be up from the £1,971 set in April 2022, and could add £83 per month to your energy bill. However, there is some good news in that the UK government has promised households a £400 non-repayable grant in October, to help manage these costs.

Conclusion & invitation

As financial planners, we need to tread a difficult line. We feel it our duty to help clients prepare for the worst. However, it is important to remain positive about your financial plan and not assume a negative outcome. You can still move confidently towards your goals.

We hope this content has been informative and inspired you to develop your own financial plan. Please get in touch if you’d like to discuss these matters with us via a free, no-commitment consultation with a member of our team:

T: 0121 446 5815
E: [email protected]

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