How to Protect Yourself From a 2023 Recession

Whilst some commentators believe that the economic outlook is brighter than expected and the UK has potentially escaped a 2023 recession, others feel that the squeeze on consumer spending due to the energy crisis and a struggling manufacturing sector will continue to slow economic recovery, which means we could still be in for an economic downturn.

Even if the downturn is shorter and shallower than previously thought, there is evidence that the UK is lagging behind other countries in terms of growth.

What’s going on with the UK economy in 2023?

Some experts are of the belief that the UK economy will shrink in 2023. When this happens, companies make less money and employment figures rise. A recession or economic downturn can have a significant impact on everyday finances, with a weaker economy usually leading to higher redundancy rates and lower pay, or at least little or no growth in pay.

Even if the economy just stagnates and there is no recession in 2023, it is still important to take steps to protect yourself financially when the economy is in such a precarious position and failing to show growth.

If you are concerned about how an economic slowdown or potential recession here’s how you can protect yourself so that you make it through financially unscathed.

What is a recession?

When a country is running well, the value of the goods and services it produces – its ‘gross domestic product’ or GDP – grows. However, during an economic downturn, this value drops. When the GDP drops for two consecutive quarter-periods, this is a sign that the economy is becoming weaker.

The likes of falling business investment, higher price forecasts, continued high interest rates and a shortage of workers can all contribute towards a shrinking economy, which can lead to a recession.

The last time the UK was in a recession was 2020 following the impact of Covid. The economy took a dive of 10% for the year, marking the worst economic performance for the country in 300 years.

The recession of 2008, however, had a far wider impact, taking five years for the economy to return to the size it was pre-recession.

What is GDP?

GDP measures the size of the economy. When it rises, it can be a sign that businesses are doing well and the economy is on the up.

The Office for National Statistics collates data from thousands of companies across the UK to reach a GDP figure.

There are actually three ways of measuring the economy:

  1. The total value of goods and services produced
  2. The total income generated by the production of goods and services
  3. The total spend on goods and services, less the value of imports plus exports

These are known as the OUTPUT, INCOME and EXPENDITURE measures of GDP. Theoretically, all the measures should result in the same figure.

Is a 2023 recession likely?

It is reckoned by some experts that GDP will remain close to zero throughout 2023, and that inflation will only fall to just over 5% by the end of the year, and will stay above 3% throughout 2024. Some analysts have predicted that the UK will be the worst performing G7 nation this year, compared to 2022 when it was actually the fastest growing of the G7 advanced economies.

Many financial commentators are of the opinion that the UK will narrowly avoid a recession in 2023. Think tank the National Institute of Economic & Social Research (NIESR) forecast in February this year that the UK will narrowly swerve a ‘technical recession’, as defined by two or more quarters of falling GDP in a row, and in fact expects the economy to grow by 0.2%.

More recently in March 2023, The Organisation for Economic Coordination and Development (OECD) said it expected the UK to be the only wealthy country to shrink this year. And back in January, the International Monetary Fund (IMF) said the UK will have the worst performing economy of any developed nation in 2023, expecting the national economy to shrink by 0.6% whilst other advanced economies experience growth.

In January 2023, the economy grew by 0.3% according to official government figures. This followed a fall of 0.5% in December 2022. However, the value of all the goods and services produced in the UK was flat in the three months leading up to January 2023. This means that technically, the UK has managed to avoid a recession.

All of this points to a more positive outlook for the UK economy than the one offered by the Bank of England, which felt that there would still be a 2023 recession but that it would not be as serious as first predicted.

Whilst the NIESR has ruled out a technical recession, as has the Office for Budget Responsibility (OBR), there are still warnings that the state of the economy will make it feel like we are actually in recession, with personal disposable income having dropped for four quarters in a row.

What are the warning signs of a recession?

There are various red flags that could signal that a recession is on its way. These include:

  • Downturns in share prices signifying reduced investor confidence
  • Increases in unemployment rates due to struggling businesses making job cuts
  • Reductions in job vacancies as businesses stop hiring
  • Companies reporting losses rather than profits as demand for products and services falls
  • A drop in real wages as inflation eats into average earnings

How would a UK recession in 2023 affect my life and finances?

A recession can cause all sorts of issues that affect everyday lives, and the impact can go on for many years, even once the economy begins to recover.

Examples of how a 2023 recession or economic downturn might affect us include:

  • Lack of promotion or pay rise opportunities at work
  • Job losses as businesses make cuts to save money
  • Reduced job vacancies making it harder to find a job
  • Businesses may be forced to cut back on staff and spending
  • Services and products you once relied on may become more expensive, or disappear

A recession won’t affect everyone in the same way. For those with savings and a more secure or diversified income, the effects may not be so severe.

How to protect your personal finances during a recession?

There are various ways in which you can protect your personal finances and money during a recession or economic downturn.

Pay off debt and live within your means

Wherever possible, try to settle any large debts you have. If you have more than one debt, address the ones with the highest interest rates first before moving on to the next. If it is not possible to pay off the debt, enquire as to whether you can move to a lower interest rate.

Also, be careful about taking on any new debt, and ensure you are not spending more than you can afford each month. Taking steps to reduce your outgoings if you need to is wise, even if it is only a temporary measure which creates a financial buffer to help you weather any economic downturn or potential recession in 2023.

Build up a contingency fund

If you have any money left over once all the bills are paid each month, start building an emergency cash fund. This will help to protect you from any unexpected bills without having to borrow as well as helping you cope with a period of unemployment.

A good rule of thumb is to try and put away 3-6 months’ worth of your average expenses, which is the average amount of time it takes to find a suitable replacement job.

Take investment advice

Whilst it may seem counterintuitive, a recession can often be a good opportunity to invest. Providing you have a good contingency fund in place, and are not overly risk averse, it may be worth taking professional investment advice to see if there are ways in which you can make your money grow.

Generally, a defensive investment style tends to work during a recession, which means choosing stocks and funds that are resilient at all stages of the economic cycle. Whilst spending on luxury goods falls during periods of economic downturn, everyday items such as medicines toilet paper will rarely suffer.

Look into an additional source of income

Even if you have a secure, full-time job, it is never a bad idea to have some form of additional income. Whether you buy and sell on an internet auction site, offer consulting services or publish a blog with affiliate income, you will benefit from diversifying your income streams. That way, if one stream is lost, you’ll have the other one to fall back on. It may even be that once the recession is over, you have a thriving new business.

Diversify your investments

Just as it can be beneficial to spread your income streams, so the same can be said for your investments.

If possible, you should try to build a portfolio of investments that are not connected. So when one is up, the other is down, and vice versa. It is also wise to consider assets and stocks in industry sectors that are not related to your primary occupation or income stream.

Remember, professional investment advice from an independent expert is vital whenever you are planning investments.

Maintain a high credit score

When the economy tightens and lines of credit become more difficult to access, it will be those with excellent credit ratings who will be approved for any form of lending. Keep your credit score high by keeping credit cards open, paying your bills on time and maintaining a low ratio of debt to available credit.

If you are facing difficulties in paying your creditors, be sure to keep in touch with them and try to make arrangements to keep your accounts in good standing. Many lenders would rather retain you as a customer than have to write your account off as a bad debt.

Implementing such financial strategies won’t just serve you well during a recession; they will also help you regardless of what’s happening with the economy.

Looking to recession-proof your finances? Talk to Partridge Muir & Warren.

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