WE explain how to protect your finances as experts fear the UK is heading for a double-dip recession.
Latest figures show the economy shrank 2.6% in November following the second national lockdown in England.
The slump ends six months of consecutive growth after gross domestic product (GDP) increased by 0.6% in October.
It means experts now fear the UK could head into a double-dip recession – the first since 1975 – once the true impact of the current third lockdown is revealed.
This is despite the 2.6% drop in growth for November being less than the 5.7% slump economists had predicted.
A double-dip recession is when the economy shrinks, briefly recovers, and then contracts again.
What does a falling GDP mean?
GROSS domestic product (GDP) is one of the main indicators used to measure the performance of a country’s economy.
When GDP goes up, the economy is generally thought to be doing well so today's figures signal that the economy is doing poorly.
Negative growth often brings with it falling incomes, job cuts and lower consumption.
The economy is in recession when it has two consecutive quarters (ie six months) of negative growth.
Following the global financial crisis that started in 2007, UK GDP fell by 6 per cent.
This marked the deepest recession for 80 years.
The Bank of England (BoE) uses GDP as one of the key indicators when it sets the base interest rate.
This decides how much it will charge banks to lend them money, and is a way to try to control inflation and the economy.
So, for example, if prices are rising too fast, the BoE could increase that rate to try to slow the economy down. But it might hold off if GDP growth is slow.
The BoE cut interest rates twice in March due to coronavirus.
Base rate cuts means mortgage borrowers now typically benefit from lower rates, but at the other end of the scale savers earn less on their savings.
The UK economy would need to shrink again for two consecutive quarters – or six months – to fall into double-dip recession territory, experts at AJ Bell told The Sun.
December GDP figures haven't been released yet, so we don't know if the economy contracted overall for the last three months of 2020.
The economy would also need to decline for the first quarter of 2021 – so January to March.
The UK was plunged into its "worst ever" recession last year but it rebounded out of the decline after the economy grew a record 15.5% in the three months to September.
GDP for the UK is now 8.5% below its pre-pandemic peak in February 2020.
Tom Selby, senior analyst at AJ Bell, said: “With large parts of the economy now locked down for a third time, a double dip recession looks like a real possibility.
"Unemployment is rising, meaning many people will find money is tight and job opportunities are scant.
"As with previous recessions we’ll also see debt levels increase and earnings either stay flat or fall."
If you're worried about your finances, we take a look at the steps you can take to try and keep your cash safe.
Cut back your outgoings
Go through all your bank statements and accounts so you know exactly where your money is going each month.
Of course, there are bills that you can't avoid paying – but that doesn't mean you can't cut back in other ways.
For example, you could save money by switching energy provider or moving to a cheaper mobile phone tariff.
It's also worth seeing what subscription services you are signed up to and if you can cancel them to save cash.
To stay organised, use an online budget planner to sort through your finances.
This online budget planner from MoneyAdviceService is free to use.
Joshua Elash, director of property lender MT Finance, said: "With a double-dip recession looming, now more than ever is the time to save – cash is king.
"Getting rid of the non-essentials can help any household create savings, which can act as a safety net."
How to save on your energy bills
SWITCHING energy providers can sound like hassle – but fortunately it’s pretty straight forward to change supplier – and save lots of cash.
Shop around – If you're on an SVT deal you are likely throwing away more than £300 a year. Use a comparion site such as MoneySuperMarket.com, uSwitch or EnergyHelpline.com to see what deals are available to you.
The cheapest deals are usually found online and are fixed deals – meaning you'll pay a fixed amount usually for 12 months.
Switch – When you've found one, all you have to do is contact the new supplier.
It helps to have the following information – which you can find on your bill – to hand to give the new supplier.
- Your postcode
- Name of your existing supplier
- Name of your existing deal and how much you pay
- An up-to-date meter reading
It will then notify your current supplier and begin the switch.
It should take no longer than three weeks to complete the switch and your supply won't be interrupted in that time.
Set-up a rainy day fund
Once you've cut back on costs, work out how much you can afford to save each month and put it in a rainy day fund.
This means you'll have a nest egg put away in case something bad happens.
For example, if your car breaks down or you need to replace an essential household white good.
Some experts say you should aim to have three to six months' worth of your outgoings in your savings.
Once you've set aside how much you'll put away, keep it separate to your money for bills, rent or your mortgage.
Vincent Reboul, managing director of Hitachi Capital Consumer Finance, said: "Keep the amount for essentials somewhere physically different, such as a separate bank account.
"It may look like a smaller amount left, but it will make you more conscious about what you can spend your money on."
Safety-proof your savings
Make sure your rainy day fund is protected by the Financial Services Compensation Scheme (FSCS).
This scheme covers cash up to £85,000 per financial institution if the bank goes bust.
Once you know you're protected, check you're getting the best interest rates.
Use a comparison site, such as Moneyfacts, to check for the best buys.
The top easy-access rate is currently 0.6% but you can earn more if you're able to lock cash away.
For example, the best regular savings rate is 1.5% but you won't be able to access your money for five years.
The best one-year bond is currently 0.8%.
Banks link savings rates to the Bank of England's base rate, which means if the base rate drops, savings rates drop too.
Consider fixing your mortgage
You may want to consider locking into a cheap fixed deal if you're due to re-mortgage your home.
Mortgage rates are linked to the base rate, so if base rate falls then so do interest rates on mortgages.
You can use a comparison site like MoneySupermarket to compare the best remortgage deals.
Justin Basini, CEO and co-founder of ClearScore, said: "Interest rates are currently at a record low, making it a great time to look for new deals.
"Look into your current deals, check what your tie-in period is and see if there are any early repayment charges so you know what makes the most financial sense for you."
Don't ignore your debts
When money is tight, it can be tempting to ignore debts – but this will only make your financial situation worse.
Stay on top of what you owe and always repay priority debts.
If you're really struggling, speak to your lender as soon as possible.
You could also consider taking out a payment holiday on your mortgage, credit card or other outstanding bills.
However, keep in mind that payment holidays should be a last resort and you will still need to repay what you owe plus interest.
There are also plenty of organisations where you can seek debt advice for free.
- National Debtline – 0808 808 4000
- Step Change – 0800 138 1111
- Citizens Advice – 0808 800 9060
Martyn James, consumer expert at Resolver, said: "Even if you can only afford a fiver a week, watching the money you owe come down can got a huge way towards helping your financial and mental health in 2021.
"As a general rule, don't pay money to get out of debt – beware debt management and consolidation services that charge."
What is a payment holiday and should you apply for one?
PAYMENT holidays are when a lender agrees to pause your monthly repayments for a set amount of time.
This has to be agreed in advance, so don't stop making your repayments until your bank has given you permission to do so.
The majority of lenders are now offering payment holidays, so get in touch with your bank to find out what help it can give you.
You will need to do this before October 31 as this is when the blanket help is due to end.
Most of the time, it'll require you to fill out an online form.
Typically, payment holidays are offered in extreme circumstances and are designed as an emergency measure to help you through a difficult financial time.
If you think you need to take one, you should speak to your lender to discuss your options – but do note that the break in payments doesn’t remove any debt or financial obligations.
Most lenders will also still charge interest during this time, so be aware that these costs will keep building up.
You should also always continue to make your normal payments if you’re financially able to.
Sue Anderson, head of media at debt charity StepChange, said: “If you can continue to make your normal payments without difficulty, then you should.
“Any temporary measures being offered by lenders don’t remove financial obligations – they are designed as an emergency measure to help you get through a period where your income may have taken a serious knock.
“However, if you need to use them then you shouldn’t hesitate to talk to your lenders.
“While taking a payment break would usually be noted on your credit file, the credit reference agencies have confirmed that, during the current crisis, this should not have a future influence on your credit status.”
Consider consolidating your debts
If you've got loads of debt to pay off, you could consider moving it into one loan or card.
It does mean you're effectively borrowing money to pay off what you owe, but the advantage is that you merge all your debt into one monthly repayment with just one lender.
Do your research beforehand though, as you don't want to end up borrowing more than you can afford to pay back.
You should also check what impact consolidating your debts will have on your credit score, and what happens if you miss a payment.
If you're considering a 0% balance transfer card, make sure you calculate how much you need to pay off each month to pay off all your debt before the interest-free period is up.
The best card currently is from Sainsbury's Bank, with the lender offering an interest-free period of up to 29 months.
Any card or loan application will appear on your credit record, so be careful not to make multiple applications or you could end up damaging your credit score.
Use a tool such as MoneySavingExpert.com's eligibility checkers to check which cards and loans you're likely to be accepted for.
Martyn continued: "If you consolidate a few cards on to one interest free deal, you'll pay a fee, usually a percentage of the total outstanding, to jump ship.
"But if you have a two year interest free deal that could save you loads.
"Be strict with yourself though. Set the highest minimum payment you can afford, cut up the new and old cards and don't even think about spending more on them."
Keep pensions and investments diversified
If all your pensions and investments are in one place, you may want to spread them out.
This could reduce the risk of your savings if something should go wrong with one company that you're invested with.
But pension experts say savers "shouldn't panic" too much about short-term economic shocks.
Nigel Peaple, director policy and advocacy, Pensions and Lifetime Savings Association (PLSA) said: “Pensions are long term investments and if there are any short-term losses on the horizons, history shows these are likely to be turned into gains over the longer-term.
"People’s pension savings are invested for the long-term in a broad range of ways designed to grow over time and withstand short-term shocks."
Before the latest lockdown restrictions were introduced, the economy was expected to grow in the first quarter of 2021.
But rising cases of coronavirus and a new mitant strain forced the government to act to save the NHS.
The pandemic has seen redundancies hit record highs with 370,000 workers losing their jobs in the three months to October.
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