Understanding the recession
You've probably heard the terms 'recession' and 'credit crunch' bandied about, but do you really know what they mean? TheSite.org explains all.
What is a recession?
A recession is defined as a reduction in a country's entire income and output (known as a Gross Domestic Product or GDP) over at least six months. This is caused by people spending less, businesses making less and banks being more reluctant to give people loans.
Recessions generally start because of a loss of confidence in the financial system. People hold on to the money that they have, rather than spend it, and that means there is less money in circulation.
It's hard to predict how long a recession will last. Statistics released at the end of 2009 suggest that, in technical terms at least, the recession is over and lasted 18 months. However, most agree that many people will continue to experience financial hardship and that economic growth will be slow for a few years to come. The previous UK recession - from 1990 to 1992 - was followed by a long period of economic growth up to 2008.
The recession came about for many reasons, but mostly because of worries about the banking system. UK and American banks took huge risks with their lending and investments in the noughties, and when things started to go sour towards the end of the decade, debts couldn't be repaid. Much of the blame was laid on sub-prime mortgages, where banks lend to people who are considered less likely to be able to pay them back.
When large numbers of mortgage-payers miss their repayments, the banks lose money. With less money available, they can't lend to businesses, meaning less investment and reducing the potential to make a profit. With less chance to make money, fewer people want to invest in companies, and this caused the value of the stock market to fall, or 'crash'.
Banks also stopped lending to each other and to consumers, resulting in what has become known as the 'credit crunch'.
World governments had to act fast to save the financial system. One solution was to get people to start spending by making billions of pounds available and trying to remove bad debts. Some say the quick action helped prevent the crisis getting worse and set the economic back on track, even if there's some way to go yet.
"Many people will continue to experience financial hardship and that economic growth will be slow for a few years to come."
The highs and lows
Recessions are a time of uncertainty and concern. "When they first started talking about the recession I didn't think it would really affect me," says John. "Then the attendance dropped massively at the club I worked at. As a recent graduate, every permanent job I've had I've lost because of the 'last in, first out' rule," he says.
These are some of the ways you could be affected:
- Your job could be at risk and you may find it difficult to get work
- It's harder to get a loan or credit cards and banks will start calling loans in quicker
- The property market slows and that makes it difficult if you are looking to buy or sell
- More people could suffer from mental health problems as they try to cope with rising debts, unemployment and housing problems
There are also a few upsides. "One definite upside is that the car has been cheaper to run," says Ben. "Over the summer it would cost over £40 to fill my car, it now costs about £32 for a full tank."
Other positives include:
- Some shops lower prices and put on more sales
- You'll find new ways to socialise with your friends
- You'll discover plenty of activities that won't stretch your wallet
Is my job safe?
With less money going around the system there are fewer jobs available. Some sectors are seen as more secure; working in the public sector is regarded the least at risk. Other industries, such as IT, HR, energy and fuel are also seen as fairly safe. And a recession is often seen as a good time for entrepreneurs, so if you've ever wanted to run your own business now could be the time to give it a go.
Tightening the money belt
While some prices might be cut during a recession, others could rise as companies try to make money where they can. But there are hardship loans if you're at university and benefits if you're on low income that can help. You can also help yourself by doing the following:
- Don't ignore people you owe money to (creditors); get help with debt
- Prioritise your debts; debt advisers can help you plan your budget and pay your priority debts first
- Download a budget form and see if you can save money
- Check if you're claiming all you're entitled to, such as housing and child benefit
- You may be able to claim help with education costs and even get a grant to help you pay for things like fitting home insulation
- Your gas and electricity supplier may be able to help you, too, if you have fuel debts
- If you are in work, you might get Working Tax Credit
- If you have children, are you claiming Child Tax Credit?
- If you lose your job, go to your local Jobcentre Plus office and start claiming what you're entitled to
Written by Anthony Burt
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