- UK economy enters recession
- GDP declines 0.3%
- Impact on savings, mortgages
At the close of 2023, the British economy entered a recession, according to data released by the government on Thursday.
The Office for National Statistics reports that the final three months of the year witnessed a 0.3% decline in gross domestic product, which was a greater contraction than initially anticipated.
In conjunction with the 0.1% decline in GDP for the three months leading up to September, this signified two consecutive quarters of negative growth, which is sufficient to qualify as a recession.
However, this is being referred to by many as a “technical” or “mild” recession due to the fact that growth has declined only marginally and not significantly.
We analyse the implications of this situation on your investments, savings, pension, and mortgage, as well as how you can fortify your financial position during challenging periods.
What precisely is a recession?
A recession indicates that the economy has experienced a decline. Due to the retrograde nature of this measure, both enterprises and individuals are already experiencing its impacts.
The economy is currently experiencing a contraction due to a lack of available funds, rather than expansion. However, this trend has been evident since July, when negative GDP growth was first observed.
Effects of recession may include:
Organisations that reduce output Employers that reduce staffing, wages, or work hours The government’s tax revenue is declining. People who spend less money in stores and on services A recession proclamation will not significantly alter the financial situation of the majority of individuals. Conversely, many may perceive it as a perpetuation of the increased expenses and constrained financial resources they have endured during the previous two years.
Furthermore, given the deceleration of inflation to 4% and the subsequent increase in wages to 6%, they might even perceive a modest amelioration in their financial hardships subsequent to the cost of living crisis.
Nevertheless, a recession undermines confidence and potentially complicates future job searches and salary increases.
It could also imply that banks implement more stringent regulations regarding the issuance of mortgages and loans, as they did in 2008, at the onset of the previous recession.
The Bank of England might be prompted to contemplate a base rate reduction prior to the anticipated cut in interest rates subsequent to their substantial ascent over the previous three years in the event of a recession.
The objective of implementing interest rate hikes was to combat inflationary pressures by augmenting the cost of financing and diminishing demand, which subsequently translated into decreased expenditures by both individuals and businesses.
At this time, inflation is declining, and the Bank will be concerned with preventing a further decline in economic growth.
Ed Monk, associate director at Fidelity International, stated, “While it is possible that the economy will regain its positive momentum in the coming months, there is currently little reason to be overly ecstatic about that.”
“This news will place additional financial strain on governments, businesses, and their employees, as well as households.”
What course of action should investors take during a recession? Aside from the fact that rising inflation and the base rate have been detrimental to numerous aspects of our finances, they have benefited those who save.
Although they have declined from their zenith in 2023, the most favourable savings rates remain significantly higher than they have been for a number of years.
Assessing whether the return on any funds that you have set aside is optimal is a critical consideration.
At the present, the best easy-access savings offer an interest rate of 5.15 percent, while the best fixed-rate offer offers 5.21 percent.
One can verify optimal rates by utilising This is Money’s impartial tables of best-buy savings rates.
Potentially, a reduction in the base rate by the Bank of England could prompt banks to lower savings rates.
Therefore, individuals who do not require immediate access to their funds may wish to contemplate opening a fixed-rate savings account.
This would enable them to maintain their fixed-term rate despite potential declines in rates elsewhere.
Navigating Savings and Mortgages
Dean Butler, managing director for retail direct at Standard Life, stated, “Retail banks pricing in an expected cut to the base interest rate will likely have the most immediate effect on your short-term savings, as the official declaration of recession will increase the pressure on the Bank of England to begin to alter its stance.”
Interest rates on Best Buy savings accounts have already begun to decline from approximately 6% last year to below 5% this year; therefore, now is a good time to shop around for the best rate before rates possibly fall even further.
What impact does the recession have on your mortgage? Mortgage debtors have been subjected to exorbitant interest rates for the past two years, ever since the base rate hike was initiated by the Bank of England.
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According to UK Finance, while the majority of individuals will remain protected against interest rate changes until the end of their fixed-rate agreement, 1.6 million Britons will reach the end of their current agreement this year.
A significant portion of individuals who made investments two, three, or five years ago will be departing from interest rates below 2%. At present, the mean interest rate for a two-year fix is 5.68 percent, while for a five-year fix it is 5.26 percent.
Those who own at least 40% of their residences are still capable of securing a five-year fix below 4% and a two-year fix around 4.25 percent, provided that they meet those requirements.
