When Jeremy Hunt took to the dispatch box on 17 November 2022 he delivered his first major announcement as chancellor and confirmed that the UK was in recession. Earlier that month, the BBC reported that it could be the longest recession on record.

Since then, the Bank of England has raised the base rate once again, to 3.5%, citing an economy that was “expected to be in recession for a prolonged period and CPI inflation [that] was expected to remain very high in the near term.”

With the UK economy shrinking, inflation remaining high, and unemployment set to rise, what does a recession mean for your finances in 2023? And what can you do to mitigate its effects?

Keep reading to find out.

The UK economy is shrinking, with unemployment set to rise

The coronavirus pandemic and the war in Ukraine have meant that economies are struggling globally. The UK, though, continues to see the slowest growth of all the G7 nations. Global supply chain issues, Brexit labour shortages, and political upheaval have all played a part.

The Bank of England (BoE)  recently noted that the UK economic outlook was “very challenging”. 

A lack of economic growth affects us all, hitting business profits and, in turn, affecting dividend payouts and pay rises. Recession can decrease the government’s tax take and might also mean rising unemployment.

The BoE expects the recession to continue for a “prolonged period”, potentially making it the longest since records began (in the 1920s).

Inflation is set to remain high for the first half of 2023, after which it could fall sharply.

According to the BBC, the Office for Budget Responsibility (OBR) expects the UK economy to shrink by 1.4% in 2023, causing an overall drop throughout the recession of 2% of GDP. Its forecasts suggest that the economy will grow marginally in 2024 (by 1.3%) and 2025 (by 2.6%).

Unemployment levels are likely to rise as a result, possibly to levels not seen since the height of the pandemic.

3 simple ways to recession-proof your finances

1. Build an emergency fund

At Expert Wealth, we would always advocate for an emergency fund of between three and six months’ worth of household living expenses. A prolonged recession can lead to unexpected financial shocks and make the need for a rainy day fund even more pronounced.

Inflation remains high, the cost of borrowing is increasing, and markets remain turbulent. Make sure you have money set aside to cover unexpected costs.

Remember that if you don’t yet have an emergency fund or if it diminished during 2022, you don’t need to build the entire pot in one go. Put money aside each month as part of your 2023 budget, and you’ll have additional funds on hand if you need them.

2. Reduce your debt

With mortgage rates rising, now might be a good time to pay off any high-interest debt you have, if you can afford to. 

Car loans or credit cards can quickly eat up your monthly income, which prevents your money from going where it needs to (see point three).

Start with the highest interest debt and redirect that money, being sure to pay your future self first.

3. Prioritise your pension

Your pension is an incredibly tax-efficient way to ensure your financial security in later life. Times have been hard for many since the pandemic, and the UK economy’s slow recovery since has further exacerbated the situation for millions of households.

While many found they needed to lower or completely stop their pension contributions, the long-term effects of this could be huge.

The financial plan you have in place is aligned with your long-term goal, your dream retirement. Any changes now could detrimentally impact that plan, meaning you would have to work longer or put more aside in later life to make up for lost gains and the effects of compounding.

Despite the recession, your pension remains a tax-efficient vehicle for your future security, so prioritise it in 2023.

Get in touch

With decades of experience, our Chartered Financial Planners have the expertise to help you plan your retirement your way. If you have any questions, please get in touch and speak to us today.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.