What does a UK recession in 2024 mean for your finances?

While inflation in the UK has fallen significantly over the last few months, it’s still double the Bank of England’s 2% target.

When it comes to everyday expenses, this means the cost of groceries and energy bills have remained high.

After consistent base rate rises, leading to higher mortgage rates, millions of people in the UK have been hoping for better news.

Unfortunately, news broke on Thursday, 15 February, that the UK has fallen into a recession.

The economy shrunk by 0.3% in the last quarter of 2023 after contracting 0.1% between July and September.

According to media reports, the main reasons that caused the recession were people spending less, doctors’ strikes and a decrease in school attendance, the latter of which is important as the ‘value of education’ is included in economic data.

There’s also a risk of stagflation emerging in the UK, which is when there’s high inflation and an economy that’s struggling to grow, as well as high unemployment.

Currently, the UK is struggling with high inflation and sluggish economic growth, but unemployment is currently low at 3.8%.

We’ll reveal what a recession is and the causes and how it could impact you in 2024.

What is a recession? 

A recession is when an economy contracts over six months (two consecutive quarters), as measured by gross domestic product (GDP).

GDP measures the size and health of a country by looking at many factors, including household spending, government spending, investment and net exports.

What can cause a recession in the UK? 

Many factors can cause a recession, but a significant one is when borrowing costs rise quicker than expected.

This has a huge impact on our finances, especially for aspiring and existing homeowners.

Those looking for a mortgage or planning to remortgage soon now face higher costs if they want a fixed-rate deal, while variable mortgage rates have soared after many base rate increases.

In a bid to tackle high inflation, the Bank of England (BoE) has hiked the base rate 14 times in over two years, so it now stands at 5.25%, but cuts are expected from mid-2024.

However, higher borrowing costs are not the only risk to the UK economy.

As the cost of living crisis continues and inflation does not ease as quickly as anticipated, people are struggling with high energy bills and groceries.

What does a recession mean for my money? 

It can be difficult to determine the actual impact of a recession on UK workers, but previous recessions can offer some insight.

Businesses may reduce their workforce to save money, which may be a priority amid higher costs.

Inflation may continue to make everyday essentials more expensive, with discretionary spending feeling the squeeze.

If you’re looking for a job, it might become more difficult.

If you’re hoping for a pay rise to ease the impact of inflation on your finances, this could be tricky as company budgets may be reduced.

What should I do during a recession? 

While nothing is certain, clearing any debt, especially high-interest debt, is worthwhile.

Building an emergency cash fund to cover three to six months' worth of expenses is also wise, as this will help protect you during a recession and can help cushion any blow to your income.

You should also make sure you have insurance in case the worst happens.

An insurance broker can help you find the best insurance for your unique circumstance, whether you need a life, critical illness or income protection policy.

Often, people are tempted to cut back on pension contributions during tough times, but you should avoid this, as it'll likely impact how much you have when you retire.

If you have a mortgage, get a fixed-rate deal if you can via a mortgage broker, so you know what to expect. You can secure a good rate now if your deal expires in six months and switch to a lower one if it becomes available.

It’s a good idea to speak to an independent financial adviser who can help you plan your finances, regardless of what the future holds.

An adviser can look at your unique circumstances and recommend ways to protect your income and reach your financial goals.