Understanding a recession and how to weather the storm

The last 2 years have been turbulent to say the least, with the Global pandemic. In its wake, economists are predicting the UK is heading for a recession, if not already in one. In order to understand how this might affect your business and what you can do to prepare for it, let us start with understanding a recession and what you can do to mitigate risks.

What is a recession?

According to Forbes, a recession is:

‘a significant decline in economic activity that lasts for months or even years.  Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.  They are considered an unavoidable part of the business cycle – or the regular cadence of expansion and contraction that occurs in a nation’s economy.’

Factors that can cause a recession

Having now outlined what a recession is, below are a few things that can cause one:

  • Economic shock
  • Too much inflation and deflation
  • Changes in technology

But how does this relate to the UK?  If you look back to the 1950s, we have had a recession every decade.  You will be able to see some of the above list in the table.

Name Dates Causes
1956 Q2 – Q3 Uncompetitive motor industry, inflationary pressures, credit squeeze caused by high bank rate, effects of the Suez crisis – oil embargo by NATO and other Arab countries.
1961 Q3 – Q4 Time lag from the ‘Rolling Adjustment’ recession in America and high bank rate.
Mid-1970s 1973 – Q3 – Q4

1974 – Q1

1975 – Q2 – Q3

 1973 oil crisis, stagflation, the decline of the traditional British industries, inefficient production, high inflation caused industrial disputes overpay.
Early 1980s 1980 – Q1 – Q4

1981 – Q1

 Deflationary government policies including spending cuts, pursuance of monetarism to reduce inflation, switch from a manufacturing economy to a services economy.
Early 1990s 1990 – Q3 – Q4

1991 – Q1 – Q3

 US savings and loan crisis, high bank rate in response to rising inflation caused by the Lawson Boom and to maintain British membership of the Exchange Rate Mechanism.
Great Recession 2008 – Q2 – Q4

2009 – Q1 – Q2

 Late 2000s financial crisis, rising global commodity prices, subprime mortgage crisis infiltrating the British banking sector, significant credit crunch.
COVID-19 2020 – Q1 – Q2 Pandemic

Looking back to GDP, let us take a look at some statistics.[1]

Year GBP (trillion)
2021 2.2
2020 2.04
2019 2.26

It is not all doom and gloom, however.  Given everything that was happening in 2020, the UK remained the 5th largest economy alongside the United States, China, Japan and Germany.

There are steps you can take to prepare for a recession and also pitfalls to watch for.

Preparing

  1. Evaluate and prioritise financial commitments
  2. Explore and apply for Government aid solutions
  3. Save (do you have an emergency fund)?
  4. Always be aware of your financial situation

[1] UK GDP – Statistics & Facts | Statista

Pitfalls

  1. Do not take on new debt (car loan, home improvement etc)
  2. Do not take your job for granted
  3. Reconsider new investments
  4. Watch spending (the bottom line)

How can we help

Talk to us at FJCM to understand the above in relation to your own business situation.

It is important during times of a recession to monitor the credit worthiness of your customers, whilst also ensuring they continue to have means to pay you.

Effective and proactive credit control is the answer. Whilst you are busy with customers, we can work hard behind the scenes to ensure they continue to pay you on time.

We have extensive knowledge of supporting companies with their cash-flow and maintaining credit terms with clients.

Learn more about how we help