Why UK households are in a better position to weather recession than 1990s: Sarah Coles

On the plus side, before this development, it was pretty much wall-to-wall bad news and the sense of an inevitable slide into misery.

And while the few bright spots haven’t wiped out all the problems that are set to come, they do offer some hope.

Recently we had the good news that we may not have entered a recession at the end of last year.

The economy shrank between July and September, and was expected to do so again between October and December – pushing us into a recession. However, the economy actually grew 0.1 per cent in November.

If this translates into growth between September and December, then we may well have staved off a recession until the middle of next year.

The bad news is that this may well just be a delay rather than a change in fortunes.

And to be frank, just because we’ve escaped a technical recession, it doesn’t change the reality of our daily lives.

The Office for National Statistics found that just under one in ten people have been unable to pay at least one bill, direct debit or standing order in the previous month, and more than one in five had borrowed more than a year earlier.

So recession or not, times are tough.

To make matters worse, when the recession comes, it could be worse than predicted.

Ernst & Young says the gloomy outlook, higher taxes and the removal of government support with energy bills all mean the recession could be deeper than it previously thought – with a 0.7 per cent drop in GDP this year.

The consensus forecast is even worse – with the economy shrinking 0.9 per cent.

This is likely to affect jobs, and the Bank of England expects unemployment rates to rise about as much as they did during the 1990s recession.

The good news is that this isn’t a foregone conclusion, and many people are more optimistic.

During the meeting in Davos, the World Economic Forum said that growth forecasts had picked up worldwide, so things wouldn’t be as bad as had been predicted.

JP Morgan analysts, meanwhile think the fall in the wholesale gas price will mean GDP falls just 0.1 per cent this year.

Andrew Bailey of the Bank of England is more positive too, saying that interest rates may not have to be hiked as much as had been previously forecast. They’re not saying things are going to be good, but they may be better than you expect.

Unfortunately, people will still be wrestling with higher prices, because while we may be past the peak of inflation, it’s still expected to stay significantly higher than usual for months.

And while it is likely to halve by the end of the year, wages aren’t expected to have made up the ground lost over the past year. Interest rates will take a toll too.

On the plus side, as we face this future, we’re in a better position than we were before previous recessions.

If you compare it to the early 1990s recession, our financial resilience has improved enormously, which owes a great deal to the fact that far fewer people have mortgages with high loan-to-value ratios.

At the moment, less than 1 per cent of outstanding mortgage lending is at or above 90 per cent loan to value, compared to 30 per cent in 1993.

Back then, people’s stretched finances meant that as house prices fell 9 per cent and the recession took a toll, more homeowners stopped paying their mortgage bills. Heading into this recession, negative equity is likely to be less of an issue.

We’re also tackling this recession with more money in the bank to fall back on. The HL Savings & Resilience Barometer shows that while by the end of the year we will have lost two thirds of the financial resilience we built during the pandemic, thanks to things like lockdown savings, we’ll still be in a stronger position than before 2020.

Unfortunately, this strength will be horribly unevenly distributed.

Those earning less than average have been hit harder by rising prices, and were less likely to have built lockdown savings in the first place.

It means they’ll get to the end of this year with less financial resilience than before the pandemic. It’s one reason why there’s such concern about the levels of debt people will be carrying by the end of the year – and their ability to keep making repayments.

And just when you need me to say, ‘but it’s not all bad because…’, that’s where the good news ends.

There’s no upside in sight for those on lower incomes who are struggling now, and will continue to do so in future.

The government is aware of this, which is why lump sum support payments have been focused specifically on those on lower incomes.

The question is whether this will be anything more than a drop in the ocean for those who have been at the sharp end of both the pandemic and the cost-of-living crisis, and for whom there doesn’t seem to be an end in sight.

Have savings rates peaked?

Inflation is likely to have peaked, which has implications for savers looking for a new home for their cash – because it means fixed rates are also on their way down.

Inflation isn’t going anywhere fast for now, so we’re still expecting more interest rate rises in the near future, from 3.5 per cent to around 4.5 per cent.

We could see a rise of 0.5 points when the MPC meets in February. This is likely to mean variable rates tick up again.

However, if you’re waiting for the rate rise before you fix your savings, you may miss the boat. February’s rate rise is largely priced into current fixed savings rates.

Meanwhile, the market also considers the likely path of interest rates in future - and as times get tougher further down the line, the Bank of England is expected to make cuts.

Lower interest rate expectations further ahead are also increasingly baked into fixed rates. It means we’ve already seen some of the best rates withdrawn, and we may well see this trend continue.

If you’re planning to opt for a fixed-rate savings account, it may pay to do it sooner rather than later.

The good news is that with the best two-year fix close to 4.5 per cent and City forecasters estimating inflation will be around 5.2 per cent this year, and lower next year, your savings could keep up with inflation.

Sarah Coles is a Hargreaves Lansdown Senior Personal Finance Analyst and Podcast Host for Switch Your Money On