What could a recession mean for your money?

The UK economy fell into recession in the last three months of 2023, according to figures from the Office for National Statistics (ONS). But what difference will it make to your money?

Although there are hopes the economy is turning a corner - the latest figures show it grew by 0.2% in January - it's too early to know how long the recession will last. 

Inflation also remains stubbornly high at 4% - that's double the Bank of England's target of 2%. It means households are continuing to feel the squeeze from rising prices and may be reluctant to spend their way out of the latest economic slump.

Here, Which? sets out what a recession is, and what it could mean for your money.

What is a recession?

The latest figures from the ONS showed the economy contracted by 0.3% between October and December. That followed a fall between July and September. It means the UK has dipped into a technical recession, defined by two or more quarters in a row of falling GDP. That's despite the economy growing by 0.1% during the whole of 2023.

GDP is used to measure a country’s economic success. It’s based on factors such as how much people are spending and the value of a country’s exports.

How long will the recession last?

The UK has been teetering on the edge of a recession for a couple of years now, but the last time we saw one officially was at the start of the pandemic in 2020. While that lasted six months, it was relatively short-lived compared to the Great Recession of 2008 to 2009, which stretched for more than a year.

Bank of England (BoE) governor Andrew Bailey signalled the current recession is likely to be brief and the latest figures from the Office for National Statistics (ONS) offer hope that the current downturn will indeed be over quickly.

The ONS data shows the economy grew by 0.2% in January 2024. That was down to a boost in the services sector, which includes businesses like hairdressing and hospitality. A rise in shopping on the high street and supermarkets also helped lift the economy in the New Year - a time when many stores run sales events. 

What could a recession mean for you?

Job losses

Because there is less money circulating in the economy during a recession, employers often look to make savings to weather the storm. That can lead to job cuts.

Unemployment during the 2008 to 2009 recession, for example, peaked at 10%. The good news is that the unemployment rate has been shrinking since the end of 2020, according to the ONS, and fell to 3.8% in the final quarter of last year. 

• Find out more: how to calculate redundancy pay

Lower wages

Rising costs will see businesses and consumers trying to save money. For employers, this could mean forgoing pay rises, leaving workers with lower real-terms paycheques to cover higher energy bills and grocery prices.

Credit crunch

The 2008 to 2009 recession led to a ‘credit crunch’, which saw people struggling to find options for borrowing. 

How do things stand today? The Bank of England’s latest Credit Conditions survey doesn't suggest we're heading for a similar crisis. 

Lenders reported an increase in the availability of secured credit in the final quarter of 2023, and that options are likely to stay unchanged in the first three months of 2024. Availability of unsecured credit was unchanged in quarter four of last year and is expected to increase slightly in the first quarter of this year.

Will your money be safe in your bank?

The 2008 to 2009 recession produced shocking images of long queues outside cash machines, as customers rushed to withdraw their money from struggling banks. As this is expected to be a shallow, short-lived recession, it's unlikely we'll see similar scenes. 

The Financial Services Compensation Scheme (FSCS) will protect up to £85,000 of your money, per institution. So if your bank does collapse, you’ll be able to recover this amount.

• Find out more: the FSCS explained

This article has been updated several times since it was first published. The last update was on 13 March 2024.