There is a lot of talk about whether or not we are going into a recession due to coronavirus. But how does a recession actually affect the average person?
What is a recession?
In normal years, a country’s economy is growing. That roughly means there is more income, more spending and more trading. Gross domestic product – the value of all goods and services – increases.
In a period of recession the economy is not growing. By definition, a recession is when economic growth falters for a period lasting a few months. If it carries on for a long time, then it is called a depression.
In either case, when the economy slows there are generally fewer jobs and money is less free flowing between government, businesses and people.
Are we in a recession now?
Technically, yes. Many developed countries including the UK saw their economies shrink month over month this year as the virus made its way across the globe.
And forward-looking projections are not optimistic. The International Monetary Fund (IMF) predicts huge falls in GDP for the full year of 2020, which could qualify as a depression.
What does a recession mean for me?
Consequences of the recession are not always clear, and the full impact may not be seen for years. For example, unemployment is already up, and will likely increase significantly in the months ahead. In addition to many people losing their jobs, many will find it harder to secure new opportunities and promotions.
The impact on the housing market and mortgage rates is also unclear, as many people are holding off on buying and selling houses amid the uncertainty. The impact on pricing in the months and years ahead remains a mystery.
At the same time, investors will be pleased that stock prices are on the rise this year – even above pre-covid levels. Although many wonder how long this will last.
What can I do to prepare for a recession?
Some people, industries, and professions will feel the recession more than others. But we can all take steps to prepare against hard times by saving up and tightening our belts.
If you do not have an emergency savings fund, this is a good time to start building one up. Ideally, this will prepare you for three months of necessary spending. Tips on how to build an emergency savings fund are here.
This is also a good time to budget your spending, or update your budget if you have not done so in a while. Money Dashboard can help with this, as the free app gives you an overview of your spending habits, helping you decide where you’d like to cut back. Tips on how to budget on a low income are here, and tips to reduce spending are here.