Metis AM
For the past few weeks, Conservative leadership candidates Rishi Sunak and Liz Truss have been battling it out to see who will take over as the next prime minister of the UK. But whoever wins, they’ll have their job cut out for them as the country faces mounting economic troubles.
Not only is the UK still recovering from the disruptions caused by the coronavirus pandemic, but the cost of living crisis is now posing a serious threat to millions of households. As a result, many people are worried that the UK is heading for a recession like the one we saw 14 years ago.
Read on to find out more about the difficult situation the country is in and whether the incoming recession could be as bad as the 2008 financial crisis.
Rising inflation has forced many households to reduce their spending
One of the biggest threats to the wellbeing of the economy is the recent cost of living crisis, which has forced many households to tighten their belts.
As we discussed in a previous article, the war in Ukraine has caused the price of food and fuel to rise sharply. Due to international sanctions on Russia, energy bills have also gone up as the cost of oil and gas have increased.
While Ofgem has placed an annual cap on energy bills to support consumers, the high price of fuel has pushed up the threshold considerably. According to government figures, some economists predict that it could reach £3,582 in October, an 82% increase from its current level.
Due to the rises in the cost of living, many households have had to reduce unnecessary spending. But while this can be a useful way to save money in difficult times, it poses a problem for the wider economy.
After all, if everyone cuts their outgoings then many businesses will struggle with lower profits. This can lead to them having to lay off workers, creating more unemployment and further reducing spending in the economy.
Rising interest rates could pose a problem for mortgage holders
Another serious problem concerning economists is the high level of debt of many households. According to a study published in the Guardian, 1 in 10 households said that loan repayment was a heavy financial burden for them.
This problem may get worse in the near future, as the Bank of England (BoE) raises their base rate as part of their strategy to combat inflation. By doing so, they can put pressure on other lenders to raise their own interest rates, encouraging people to save more and borrow less.
In August, the BoE voted to raise the base rate by 0.5 percentage points, up to 1.75%, which is the biggest rise in almost three decades. If interest rates were to go up even further, it could pose a serious issue for people who hold large amounts of debt, as their monthly repayments could increase sharply.
This could be a problem for homeowners, as the rising cost of property has meant that many Brits now have large mortgages. According to the Office for National Statistics, the average house price rose to £286,000 in June 2022.
Of course, interest rate rises would only affect you immediately if you are on your lender’s standard variable rate (SVR). If you have a fixed-rate mortgage, you wouldn’t feel the impact of the increase until the end of your fixed term.
The BoE has implemented stricter regulations to prevent a repeat of the 2008 financial crisis
Between the cost of living crisis and the potential increases to monthly mortgage repayments, many Brits could find their finances seriously squeezed in the coming months. As you might imagine, this could pose a serious problem for the economy if the situation doesn’t improve.
In a worst-case scenario, rising costs could lead to people being forced to default on their mortgages, which has the potential to cause another financial crisis. This is especially worrying when you consider that many Brits now have very large debts, due to the rising cost of homes.
But before you start to worry, it’s important to remember that since 2008, the BoE has imposed some important regulations on the banking sector. These new rules are designed to prevent a repeat of the crash and make the system more resilient.
For example, all major banks are now required to have more capital reserves, which helps to make them more stable, even if many of their customers default on their debts. The BoE now also plays a greater role in supervising the activities of banks and building societies to reduce the risk of bad loans.
These regulations mean that even if the cost of living crisis leads to a recession, it is unlikely to be as bad as the 2008 crash.
While a recession is likely, it may ease when the cost of living crisis blows over
The typical definition for a financial recession is two consecutive quarters of negative output. That’s why, given the 0.1% fall in GDP during Q2 of 2022, as reported in the Guardian, some economists fear that the impact of the cost of living crisis could be enough to push the UK over the edge.
In a recent statement, published by the BBC, the BoE announced that the economy is likely to shrink in the final quarter of the year and keep doing so until the end of 2023.
Reinforcing this, David Blanchflower, a former member of the BoE’s monetary policy committee, stated in the Guardian that “every piece of evidence suggests that recession is coming”.
Of course, it’s important to remember that nothing is set in stone and while the economy is under significant pressure, there is still the possibility that things will improve. Once supply chains recover from the shock of the war in Ukraine, the cost of living crisis will likely ease and spending will rise again.
If you’re concerned about how a recession would affect your progress towards your financial goals, it can be useful to seek professional advice. Working with a planner can help you protect your wealth, giving you confidence that you’re still on track for the life you want.
Get in touch
If you want to know more about how an economic downturn could affect your portfolio, we can help. Please email enquiries@metiswealth.co.uk or call 0345 450 5670.
