A prediction from the Bank of England that the UK economy is headed for a recession will lead to a “gloomy and more uncertain” future, according to market analysts. A recession can have a negative impact on everyday finances, as the weaker economy often leads to higher redundancy rates and lower wages.
The warning came after the Bank of England raised interest rates by the highest amount in 27 years. As the Bank struggles to stop soaring prices, it has raised interest rates to 1.75% this month. Predictions are that inflation is set to hit more than 13%, while the economy is likely to shrink in the last three months of 2022.
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It will continue shrinking until the end of 2023. The Bank of England Governor, Andrew Bailey, said the cost of living squeeze would be “even worse” if it didn’t raise interest rates. The main reason is sky-high energy bills, largely driven by Russia’s invasion of Ukraine and fuel shortages.
Why were interest rates raised?
The Bank has warned an average household in the UK will be paying almost £300 per month for their energy by October. The anticipated recession is set to be the longest downturn since 2008, when lending ground to a halt and the UK banking system faced collapse.
Mr Bailey said people would wonder why interest rates had been raised, fearing this would make their situation worse. However, he said the alternative was “persistent inflation” that would make life even harder for the British public.
Increasing interest rates is aimed at controlling inflation, as it increases borrowing costs and therefore encourages people to borrow less and save more. However, householders fear they will be further squeezed as a result of the increase, including mortgage-holders.
How did the 2008 recession affect the UK?
The recession of 2008 caused a worldwide financial crisis. In the UK, there were cutbacks in housing and retail sales. The unemployment rate rocketed after widespread redundancies. This worsened the impact of the financial crisis on the economy.
Falls in retail sales led to even more redundancies and a number of major high street stores, such as MFI and Woolworths, went bust. The financial crisis hit the UK economy particularly hard because of several unique factors. Britain had no large manufacturing base, so the economy was dependent on real estate, financial services and retail sales for growth.
The economy lacked substance due to its heavy reliance on risky credit borrowing and lending. When the bubble finally burst in 2008, these industries were hit hardest by the financial collapse. House prices fell massively and sources of credit dried up.
This meant the UK economy suffered massively, with the negative impact having long-term effects. There was an instant reduction in bank-to-bank lending. The interest rate for financial institutions that continued to borrow had doubled overnight.
Lending all but stopped and the ripple effect was visible in businesses of all sizes in every sector, but especially in the housing industry. Consumers struggled to pay mortgages and this translated into significantly less retail sales.
No-one was buying household goods, furniture and DIY products. Well-known companies closed down. A staggering 26,978 UK businesses closed down during 2008 and 2009, either going into liquidation or insolvency.
The deteriorating housing market saw a drop in sales of 20% in 2008. The economic crisis impacted almost every non-essential industry in the UK.
How can you survive the recession in 2022?
The Bank of England predicts the recession will probably start at the end of 2022 and continue throughout 2023. The effects are likely to include fewer jobs, companies making less money, decreased job security and difficulties in getting pay increases.
It will also be harder for unemployed people to find work, as businesses are likely to be downsizing. If you’re concerned about the economic slowdown and impending recession in 2022, there are a few steps you can take to help weather the storm.
First, try to pay off debts, even if it’s just a little at a time, starting with the ones with the highest interest rates. If you can’t pay it off, tell the lender about your struggles and see if you can reduce the interest rate, even temporarily.
Start building up an emergency cash fund now with any money you have left after paying your bills and other expenses each month. This can help to protect you from any unexpected bills, or to cope should you be made redundant.
If you manage to get a contingency fund in place, take investment advice to see if there’s a way to make your money grow. This could mean choosing stocks that remain resilient at all times. For example, sales of everyday essentials, such as medicines and toilet paper, will rarely suffer, but spending on luxury goods will decrease.
Look into other forms of income, even if you have a secure job. Try selling goods on internet auction sites, offer additional consulting services outside your main job, or publish a blog with affiliate income. This means if you lose one stream of income, you will have another one to fall back on.
Try to maintain as high a credit score as possible. When the economy tightens, only people with a relatively good credit score will have access to lenders. If you can’t afford to pay credit cards or loans off in full, set up an affordable repayment plan with the lender and stick to it.
Keep in touch with creditors if you’re struggling to pay debts and bills on time. Most will be happy to retain you as a customer by offering a lower repayment rate, rather than writing it off as a bad debt and losing your custom when the economy improves.
Having financial strategies in place during a recession may help you to keep afloat, enabling you to come out the other side relatively unscathed.
Applying for a logbook loan secured against your vehicle may be a useful solution if you need money for a household emergency, or have an urgent bill to pay.
Contact Logbook Loans 247 to find out how our loans work to help you get through these challenging times.
Warning: Late repayment can cause you serious money problems. For help go to moneyhelper.org.uk.