Are we heading for a recession and what would it mean for your finances?

With inflation at its highest level in 40 years, a jittery stock market and warnings about a slowing economy - fears are growing that the country is heading into a recession.

Even the hint of a recession can cause dread, especially for those who remember the economic crisis of 2008 and the slump of the early 1990s. But, while it is understandable to be concerned about the economic outlook, uncertainties remain as to whether the UK will fall into a recession and, if it does, how bad it will be.

There is no getting away from the fact that things are looking bleak at the moment, but there are also reasons to be positive.

For starters there are no indications that there will be a repeat of the financial crash 14 years ago and the subsequent years of austerity.

Although recessions can signal economic hardship, no two are the same and, at times, it can be a relatively mild downturn that has a short-lived impact.

Mike Brock (Image: Archant)

The technical definition of a recession is two consecutive quarters, six months, of negative gross domestic product (GDP) growth compared to the previous year.

GDP is the value a country's goods and services, which is why a slowing economy has raised fears that a recession is looming. But as associate professor of economics at the University of East Anglia (UEA), Michael Brock, explained even if the economy does fall into negative growth it doesn't mean all industries will be hit.

He said: "GDP looks at the total bottom line figure, it doesn’t necessarily mean that every sector in the UK is contracting and usually that isn’t the case.

"But there might be some that are contracting more than others and some that are growing, but the ones that are growing are not growing more to offset the ones that are shrinking so that, in total, you see a negative growth figure so the economy is shrinking.

"It doesn’t necessarily affect all industries equally and actually in a recession there are many industries that do quite well, particularly those that are low cost, budget type industries or shops, they do really well in a recession because people switch to consuming something else."

Although there are no guarantees that the UK will fall into a recession, Mr Brock said that there was a "strong possibility" that it will.

The Bank of England has been increasing interest rates to try and control rising inflation (Image: PA Wire/PA Images)

The main reason for this is high inflation, which we are seeing through the hike in our energy bills and our weekly food shops.

Inflation currently stands at a 40-year high of 9pc and it is expected to surge to more than 10pc by the end of December.

Part of this has been caused by countries emerging from pandemic lockdowns at the same time, which saw a hike in prices last year.

But inflation has been exacerbated by the war in Ukraine, which has pushed up gas, electric and food prices.

Unfortunately, struggling families will see no respite for the foreseeable future with supermarket bosses warning that food prices are expected to remain high.

On top of this, another energy price cap raise is predicted that would see an average £600 added to gas and electricity bills this autumn, although there are early suggestions that the cap could start to fall in spring 2023.

Even those who are managing to cope with the rising costs, are seeing their disposable income taking a hit which traditionally leads to people cutting back their spending on non-essential items.

Although the latest figures from the Office for National Statistics (ONS) show that while retail sales were up by 1.4pc during April 2022, Heather Bovill, deputy director for surveys and economic indicators at the ONS, said that "these figures still show a continued longer term downward trend."

But, after two years of being unable to spend on socialising and travelling, consumers may have built up savings that they are willing to dip into as they enjoy their regained freedoms rather than be cautious about their incomes.

In addition, unemployment figures are at a record low, with the number of job vacancies outnumbering the amount of people out of work for the first time. This could increase people's confidence to continue spending, despite high inflation.

In an attempt to control surging inflation, the Bank of England has been increasing interest rates, which now stand at 1pc, the highest it has been in 13 years.

The Bank of England's chief economist, Huw Phil, said that interest rates could be raised further saying that rates "still has further to run".

But even if interest rates continue to rise, they are unlikely to reach the peaks of previous downturns which saw rates hit 14.8pc in 1989 and 17pc in 1979.

This could, however, be the ending of the era of rock-bottom borrowing rates.

As interest rates climb, it will have a direct impact on the cost of mortgages.

And already mortgage rates are rising.

Data from Norwich-based finance firm Moneyfacts shows that the average rate for a two-year fixed mortgage needing a 25pc deposit increased to 2.9pc in May from 2.21pc the previous year. The five-year equivalent rose to 3.08pc in May from 2.42pc the year before.

As mortgages become more expensive their affordability falls, which can have a knock-on effect on the property market.

House prices are continuing to rise, but experts are predicting that the market is beginning to slow.

Many will likely welcome a slowing market as properties across Norfolk and Suffolk have reached record prices over the last year.

According to the Nationwide House Price Index, South Norfolk saw one of the biggest price rises of all rural areas in the UK with the average house costing £330,003, an increase of 19pc year-on-year.

In March the building society published research that showed the average house price in East Anglia rose to £277,332 at the start of this year, a rise of 14.2pc compared to the same period in 2021.

Although signs are pointing towards a slowing property market, there is no talk of a similar housing crash that was seen in 2008.

But as mortgage rates increase, times may become harder for homeowners as their mortgage repayments become more expensive at a time when other costs are also rising.

This could lead to homeowners looking to downsize to smaller, cheaper to run, properties and, in the worst case, see some unable to keep up with mortgage payments and defaulting as a result.

The housing market could start to slow (Image: Archant © 2006)

The current economic outlook is a complicated picture, with many uncertainties impacting whether we will enter a recession and how long and deep it will be if we do. The uncertainties are also playing a part in the government's hesitancy to hand out extra support for families and businesses.

But pressure on the government is mounting and, with some arguing that waiting for the autumn budget will be too late, there are rumours that chancellor Rishi Sunak could announce measures as early as next month to provide more support.

A number of measures could be introduced, including a windfall tax on energy companies, which opposition parties have already called for, and another council tax rebate.

While the cost of living crisis is impacting us all, there is optimism that even if the UK enters into a recession, it will avoid the financial chaos seen in 2008 and the 1970s.