What is a recession and how do I protect my savings and investments?

will there be recession 2022 coming what happen how protect money should save uk how likely cost of living crisis finance consumer affairs
will there be recession 2022 coming what happen how protect money should save uk how likely cost of living crisis finance consumer affairs

Pressure is building on British households. The cost of living crisis looms large, as rising interest rates push up costs for millions of homeowners, and energy and grocery bills remain stuck at historic highs.

The Bank of England raised interest rates from 1.75pc to 2.25pc last month to combat rising inflation – but it is not guaranteed to be enough to bring prices low enough for struggling families.

Policymakers on Threadneedle Street have already suggested that Britain is headed towards a recession. This type of downturn can have a devastating impact on people's everyday finances, as a weaker economy usually means that salaries drop and redundancies rise. Telegraph Money explains what a recession is, and how you can protect your money from the negative effects.

What is a recession?

When a country is running smoothly, the value of the goods and services it produces – its gross domestic product – grows.

But during times of an economic downturn, this value falls. A recession is when GDP drops for two three-month periods in a row, and is a sign that the economy is weakening.

How likely is a recession in the UK?

The Bank of England has already said that it believes Britain is in a recession – but this was based on a reading that turned out to be incorrect. Official data shows that the economy grew in the second quarter of this year, contrary to an initial reading which said that it had shrunk.

The economy grew 0.2pc in the three months to June, revised up from a previous reading of -0.1pc, according to the Office for National Statistics. This means that the point of downturn may be further off than initially expected.

However, a number of market watchers believe that the economy has shrunk in the three months ended in September and have predicted that the next quarter could be negative too. That would officially mark the start of a downturn.

In August, the Bank of England predicted that the economy would contract for 15 months.

How to protect your money during a recession

Pay off debt and build up cash

All economies go through natural cycles of expansion and recession. In the event of the latter, you should try to pay down any expensive debt that you may have, such as credit cards. If you have multiple debts, address the borrowing with the highest interest rate first, and then move onto the next.

If you do not have enough cash to pay down your debt, see if you can move to a cheaper rate. This can only offer some temporary relief but will give you more time to organise your finances and stop your debt from growing as quickly.

If you have money left over, you should also try to build an emergency cash fund. This can help protect you from any unexpected bills, or even help you cope with a period of unemployment. Putting aside three to six months' worth of your average expenses is a good rule of thumb.

Keep investing for the long term

While a recession often dents people’s finances, it can also be a good opportunity to invest. However, you should only consider doing so if you already have a healthy emergency fund in place and are comfortable with the possibility of losing money.

Jason Hollands, of the broker Bestinvest, said: “While recessions are undoubtedly painful for the real economy, they increasingly prompt the sorts of actions that end up being very positive for investors.”

A recession calls for a more “defensive” investment style, which means picking stocks to buy and funds that are typically resilient during all points of the economic cycle.

Mr Hollands pointed to the consumer staples sector. While spending usually falls during periods of recession, everyday items such as toilet paper and tea bags rarely suffer.

“Stocks like Unilever, Reckitt Benckiser and Procter & Gamble would fall in this category, each of which owns vast ranges of household brands,” he said.

The Evenlode Global Income fund has around a third of its fund invested in consumer giants such as Unilever and Nestle, and has delivered returns of 17pc over the past three years.

Mr Hollands also pointed to Lindsell Train UK Equity, which is run by the star fund manager Nick Train. It is invested in big brands such as the drinks manufacturer Diageo, and has gained 23pc in the past five years.

Liontrust UK Growth was another option, which held positions in the pharmaceutical giants AstraZeneca and GlaxoSmithKline.

Mr Hollands said healthcare was historically a resilient sector during recessions.

“If you are on prescription medicines, you will continue to take these irrespective of the state of the economy,” he said. “Healthcare stocks are therefore quite resilient during tougher periods.”

This article is kept updated with the latest advice.