How does a recession affect my money?

Official figures show that the UK economy fell by 0.3% in the final three months of 2023 – making it the second quarter in a row that the UK recorded negative economic growth.

It’s completely understandable if this news has got you thinking about how it might affect your money. So to help you make sense of what all this might mean for your finances, our investment, savings and mortgage experts take a look at what a recession is, along with the steps you could take to get more from your money.

What is a recession?

Kieran Ellis, Skipton’s Technical Research Specialist, writes...

The technical definition of a recession is when the economy reduces in size for two or more quarters in a row. This is what we saw happen here in the UK at the end of 2023.

When a recession occurs, it usually means less money is being pumped into the economy and people aren’t spending as much – something explained by the cost-of-living crisis we find ourselves in. In turn, this has a knock-on effect on businesses which may see a fall in their sales, meaning they have to spend less on their employees or even make job cuts.

What I want to stress to you here is that recessions are a natural part of the economic cycle. This isn’t the first time the UK’s experienced a recession – and it certainly won’t be the last.

Hearing the UK’s slipped into a recession will no doubt ring alarm bells for many. But what’s encouraging to see is many economists are predicting this downturn to be short and shallow. And perhaps even more promising, the UK economy is expected to return to growth by the end of 2024.

What does a recession mean for interest rates?

Interest rates are shaped by the UK’s base rate – which is set by the Bank of England. Over the past three years we’ve seen the Bank of England increase the base rate sharply to tackle high inflation (the rising prices of goods and services).

When the base rate goes up, banks and building societies tend to increase the interest rates they set for things like savings accounts (including ISAs), mortgages and loans. This makes borrowing more expensive and also encourages people to save more, which is one way the Bank of England tries to bring inflation under control.

To some degree this has worked, and we’ve seen inflation finally start to come down slowly but surely. However, with this latest data showing the UK’s dipped into a recession, the Bank of England now has another challenge to deal with: making sure the UK economy doesn’t shrink too much.

In response to this, it’s likely the Bank of England will make moves to reduce the base rate over the course of this year – meaning interest rates are likely to start to fall as well.

What does a recession mean for my savings?

Alex Sitaras, Head of Savings & Partnerships, writes...

Interestingly, the cost-of-living crisis has proved a double-edged sword for savers. Although things are more expensive in the shops, higher interest rates have provided a boost for the money in our savings accounts.

But what happens now we’re in a recession?

Well, at the moment, it’s likely interest rates on savings accounts are past their peak – but they still remain higher than what we’ve been used to in recent years. However, this won’t last forever. As Kieran says, there’s a good chance that rates on savings accounts could start to come down soon – we’ve already seen glimpses of this.

So if you want to be a savvy saver, it’s well worth having a good look at the interest rate you’re receiving on your savings to see if you could get a better deal. Remember, some of the offers you can get right now might not be around for too much longer.

If you don’t need immediate access to your money, a fixed rate bond or fixed rate ISA could be a great way of locking in a good return. With a fixed rate account, you’ll keep the interest rate on the account for the fixed term (for example, five years), even if interest rates are falling elsewhere. It’s worth me mentioning here that usually you can’t make withdrawals from these types of accounts and if you do, you might be charged.

Here at Skipton Building Society we have a wide range of savings accounts, which I’d definitely suggest having a browse of for your various needs. You never know, you could get your money working harder now and for the next five years.

What about saving into a pension during a recession?

As long as your short-term finances are holding up well during a recession, it’s wise to continue saving towards your retirement. Plus, if you have a workplace pension, your employer is likely to pay into your pension too which further boosts your pot.

The last thing you want later down the line is to have to retire later than planned because you haven’t paid enough into your pension. If you’re unsure about your retirement plans and you’re a member here at Skipton Building Society, we can offer you a FREE Pension Health Check. It will help you see what you need to do to move in the right direction for your retirement plans.

What does a recession mean for my mortgage?

Jen Lloyd, Head of Mortgage Products & Proposition, writes...

If you’re a homeowner looking to remortgage, this recession could play into your hands.

In a short space of time, we saw mortgage rates go from record lows in 2021 to the highest we’ve seen in 15 years in 2023. But the fact interest rates look likely to start falling could mean we see mortgage rates come down slightly too. However, we don’t expect them to fall back to the levels they were at in 2021 anytime soon.

If your current fixed rate mortgage deal is due to come to an end, one point I’d stress is that you should prepare for the likelihood of paying a higher rate than what you’re on now. It might be worth looking at your monthly expenses well ahead of time, just to check whether there are any savings you could make to cover a potential rise in payments.

Another thing you can do is to stay ahead of the curve when it comes to selecting a new deal. Usually, in the six months before your current deal ends, you’re able to choose your next one. And you’re not tied to it, meaning you can switch again ahead of your deal ending – for example, if rates were to fall in that time.

Here at Skipton Building Society we offer a range of mortgages with fixed and variable rates. There are pros and cons to each type of mortgage, which is why speaking with one of our mortgage advisers could come in useful. A chat could help you to know where you stand and make sure you’re in a good place if you need to prepare for what will likely be higher payments.

We think money advice should be free

There’s no doubt a recession comes with its own challenges, but it can also open up good opportunities for savvy savers and homeowners.

One of the best things you could do in a situation like this is to start off by having a chat about your finances to find out more about your options. And we can help you with this.

A good way to start is with a FREE My Money Review appointment. This is a relaxed conversation with one of our experienced colleagues to talk about your short, medium and long-term goals for your money. The chat takes around an hour and is very much led by you – at the end of it, we’ll provide you with a report with our recommendations on what we feel is best for you.

After the chat there’s no pressure for you to do anything and we’ll take everything at your pace. You can even book another appointment if you want to speak to us again. We could also arrange for you to speak to one of our financial advisers to discuss things like investing and saving into a pension.

Don't just take our word for it. David, from Selby, tell us about his My Money Review: