By Liam Tarry
Thursday, February 26, 2009.
The UK is now in recession, with the economy shrinking by 1.5% in the last three months of 2008, following a 0.6% contraction in the previous quarter. A recession is defined of two consecutive quarters (or six months) of negative growth.
Bearish forecasting group Capital Economics says the bigger than expected 1.5% contraction was the sharpest quarterly contraction since 1980. It was also significantly larger than any quarterly fall seen in the 1990s recession, according to the Centre for Economic Business Research (cebr).
Charles Davis, economist at the cebr, says the size of the contraction is more of a concern than the fact the UK is in a recession. He warns that the UK economy is set for the steepest contraction in the post war era in 2009, with a fall in the region of 3% year-on-year.
How long it lasts - and how bad it will get - remains to be seen.
A report by leading economic forecasting group, Ernst & Young ITEM Club, published in October, forecast a "short and shallow" recession, with the economy shrinking by 1% next year and then growing by just 1% in 2010.
However, Andrew Smith, chief economist at KPMG, paints an ominous picture for the year ahead: "Retail sales were extremely weak in December, unemployment is accelerating sharply and, with no sign that the housing market is anywhere near stabilising, it is difficult to see why things should improve in the foreseeable future."
Hann-Ju Ho, s senior economist at Lloyds Banking Group (LLOY), agrees. "We are certainly in the eye of the storm at the moment and all leading indicators suggest that there will be a further contraction in the first three months of this year. As such the UK's economy will post a negative growth for most of 2009."
Whether the recession lasts for a year or longer, the key to surviving it is to face up to your financial issues now and get them under control. Even if you don't have any debt and feel financially secure, taking a long look at your finances and budgeting for hard times is still recommended.
If you are struggling with debt then facing up to your problems is the first step to recovery.
Take some time out to review your situation, making a comprehensive list of all your financial commitments. You can find out exactly how much you owe by getting a copy of your credit record from one of the credit reference agencies, such as Experian, Equifax or Callcredit.
Now make a budget, once you have worked out where you are able to cut back, and how much you could save, you need to be sure you can afford to meet your debts. Some debts should be prioritised over others - for example, if you fail to meet your mortgage or secured loan payments then you could end up losing your home. Council tax, gas and electricity bills should also be prioritised.
If you are still unable to fully meet your debts, then you need to face up to the fact that you need help. Speaking to others will help; discuss the situation with your family, but if that doesn't lead to a solution then contacting a debt charity is a good idea. Advice groups include the Consumer Credit Counselling Service or the National Debtline.
The downturn in the housing market coupled with the mortgage squeeze means many homeowners have been hit with big spikes in their repayments. With the rising costs of living also biting people's budgets, the fear is that the number of people unable to meet their mortgage repayments will increase, leading to a jump
The number of homeowners facing repossession jumped by more than 90% over the past 12 months, according to official statistics from the Financial Services Authority (FSA). Its figures show that in the third quarter of 2008 the number of new house possessions increased by 92% compared to the same period the previous year, with 13,161 new cases.
The good news is the Government has introduced a host of measures designed to protect homeowners from aggressive repossession policies. Lenders will have to explore a variety of other options before they can repossess your home, including increasing the mortgage term or putting you on interest-only repayments.
But these measures don't offer you 100% protection from repossession - it is still vital to meet your repayments.
If you are struggling, then contact your lender immediately and explain your problem. The sooner you get in touch, the sooner it may be able to help you and, at the very least, it shows you are responsible and want to honour your debt.
You can also contact the housing charity Shelter for independent advice.
One of people's biggest concerns about a downturn in the economy are the job losses that go with. Unemployment is also on the up, and will only continue to rise going forward.
While there isn't a lot you can do to avoid losing your job, it is worth knowing what your rights are when it comes to redundancy - this effectively means that your job disappears because of your employer's need to reduce its workforce. Redundancy may happen because a workplace is closing down, or because fewer employees are needed.
If you have worked for the same employer for at least two years continuously then you should be entitled to a redundancy package. You may also be entitled to other - non-statutory - payments if this has been agreed in your contract of employment.
The amount of money you receive will depend on how long you have been employed in the company, your age and your current salary.
The Department for Business Enterprise and Regulator Reform offers these calculations for redundancy packages:
* 0.5 week's pay for each full year of service where age during year less than 22
* 1.0 week's pay for each full year of service where age during year is 22 or above, but less than 41
* 1.5 weeks' pay for each full year of service where age during year is 41+
At this time of economic uncertainty, experts say income protection is increasingly relevant. New research from Global Reviews, the customer experience benchmarking company, has found that while many people have life insurance, far fewer are protected if they are made redundant.
With household budgets already being stretched, you should think about what you would do if you were to lose your job, or become ill or injured and unable to work for a while. Unfortunately, the majority of consumers do not have more than a few months worth of salary tucked away so if they were unable to work for a longer period of time they would find themselves in serious financial trouble.
While it is impossible to predict whether you'll find yourself in this kind of situation there are a number of protection insurance policies you could take out to safeguard yourself from financial disaster should anything happen to you or any of your loved ones.
1. Life insurance
Life insurance is the most basic cover you can take out and it would pay out in event of death so should you pass away your loved ones will be provided for. A traditional life insurance policy last for the duration of your life but if money is tight you could opt for a term assurance policy instead that would last for example the term of your mortgages, say 25 years.
2. Critical illness insurance
Critical illness insurance pays out a tax-free lump sum if you are diagnosed with a critical illness covered by your insurer. It also pay out on death. All critical illness policies cover cancer, heart attack and stroke, which are the serious illnesses people are most likely to suffer from. It is important, however, to know that insurance providers have a number of exclusions and that conditions such as back pain or mental health problems would not be covered as they are not seen as "critical".
3. Income protection
This type of insurance policy would pay you an income should you be unable to work due to illness or injury and it usually pays out either until you get back to work or you retire. It would usually pay up to 70% of your income. While quite costly, this could be a lifesaver for someone who is unable to work due to a long-term illness. As part of an income protection policy you could also add redundancy cover, something which has become more popular recently.
4. Accident sickness and unemployment cover and payment protection insurance
Similarly to income protection insurance these policies would provide you a monthly income should you become unable to work due to illness, injury and, in some cases, redundancy. While many banks have been pushing these products in the past, you should be aware that they might not be that great. While sometimes they could be seen as cheaper they would only pay you an income for up to two years and there are many exclusions attached to them.
For example many policies would not pay out should you be off work due to back pain or stress-related issues despite these being the two most common type of claims filed.
One of the features of the current economic downturn is the impact on banks. We've seen two banks become nationalised in the UK so far - Northern Rock and Bradford & Bingley - and the whole sector is contracting with big players such as HBOS merging with Lloyds TSB while Alliance & Leicester has been bought by Abbey's Spanish owner Santander (BNC).
Meanwhile, a number of savings banks with Icelandic parents have been shut down by the British Government, and for the first time ever the Financial Services Compensation Scheme (FSCS) has been tested in relation to people's deposits.
Understandably, many people are still concerned about how safe their money is. Offshore savers, in particular, are up in arms because the Channel Islands of Jersey and Guernsey do not offer any deposit protection to non-residents.
The FSCS covers UK banks up to £50,000 per customer per bank, However, one issue confusing the matter is the way banks are covered by the FSCS - so, people with more than £50,000 in different accounts but in the same bank or two banks that are part of the same group may not be covered.
With thanks to Interactive Investors.