Having financial stability can seem difficult during difficult economic times. From recessions to inflation fluctuations, they impact our everyday lives as well as businesses. Adapting to these changes is crucial for maintaining financial health and resilience, so what can you do to be prepared and pivot during an economic downturn?
As it can be confusing, here we’ll explain economic downturns, their effects on businesses and individuals, and provide some practical strategies for getting through these turbulent times unscathed. If you can be as prepared as possible and proactive, you can protect your finances and possibly even find opportunities for growth amidst uncertainty.
An Economic Downturn – What Exactly Is It?
Put simply, an economic downturn is a period when the economy experiences a significant decline in activity. This is typically characterised by reductions in key economic indicators such as income, industrial production, wholesale and retail sales, and employment.
During an economic downturn, businesses may see lower revenues due to decreased consumer spending, and industries may cut back on production in response to reduced demand. Unemployment rates often rise too as companies lay off workers to cut costs. This, in turn, adds to the decline in consumer spending, creating a vicious cycle.
Economic decline can range from a mild slowdown to a severe recession, which is when there are two consecutive quarters of negative Gross Domestic Product (GDP) growth. GDP is a measure of all economic activity of companies, governments and people, and at the end of 2023, the UK went into recession due to the economy shrinking between July and September between October and December. The good news is, however, there has been growth so far this year, meaning we are out of a recession after seeing 0.6% growth between January and March 2024.
Still with us? Don’t worry, as you don’t need to be an expert on the meaning of an economic downturn. What it means for the regular public is that you will feel the impact of this on your money, whether it affects how much you have to spend on goods to even losing your job.
How Does a Recession Affect Businesses?
A recession can affect businesses in numerous ways, often disrupting how they operate. As consumer spending typically reduces during a recession, due to people prioritising their essential expenses and cutting back on non-essential or luxury items, this means businesses aren’t generating enough revenue.
This reduction in demand and decreased revenues can force businesses to make difficult decisions to tighten budgets and reduce costs. Unfortunately, this means many businesses may lay off staff, stop hiring, or even reduce employee hours to manage their costs. This is where the vicious cycle becomes evident – less spending means reduced business revenue, causing job cuts and pay freezes that mean consumers have even less to spend.
Another impact is access to credit. This often becomes more restricted during a recession, making it harder for businesses to secure financing for operations or expansion. This was something that became evident during the pandemic when many banks and finance companies had to reduce or stop lending temporarily.
Supply chains can also be affected, with disruptions and increased costs impacting production and delivery schedules. Small businesses can be particularly vulnerable, as they often lack the cash to get through prolonged economic decline. Larger companies, on the other hand, may use their resources to adapt more effectively, although they are not immune to the challenges. This is where preparation for the unknown can be helpful.
How Do Economic Factors Affect A Business?
Higher Unemployment Rates
High unemployment rates can significantly affect how much consumers can spend, leading to decreased demand for goods and services. This can be particularly challenging for small businesses that rely on local consumer spending. As people lose jobs or worry they may be made redundant, naturally they cut back on non-essential purchases, which can reduce revenues for many businesses.
Lower Inflation Rates
While low inflation rates can seem beneficial due to prices being stable, this can often mean a slow-moving economy. This means businesses might struggle to grow as consumer spending remains flat. On the other hand, low inflation benefits those with stable incomes who are secure in their jobs, as the amount they can spend remains constant, potentially boosting savings and investments.
Economic Slowdown and Potential Recession
An economic slowdown can force businesses into cost-cutting measures, including layoffs or even closures. Reduced incomes for workers mean lower consumer spending, affecting businesses’ ability to meet their own financial obligations such as mortgages and business loans. This is why businesses have to be agile and resourceful in managing cash flow and operations.
Less or More Chance to Invest
Economic conditions heavily influence investment opportunities. During economic downturns, lower asset prices might present good investment opportunities. However, those without sufficient financial resources will miss out.
General Cost Increases or Decreases
Fluctuating costs, whether due to supply chain issues or changes in consumer demand, can impact business profitability. For example, rising costs can squeeze profit margins, while falling prices might indicate weak demand, meaning businesses have to adjust their strategies.
Preparing For An Economic Downturn
So, how do you prepare for an economic downturn? As a consumer and worker, you’ll want to have some form of plan just in case money starts to become tighter.
- Start by building an emergency savings fund that can cover at least three to six months’ worth of your living expenses. This safety net can help you manage any unexpected job losses or a reduction in income. It can also help you cover unexpected expenses in general without having to rely on credit.
- Review and adjust your budget to cut non-essential spending. Then you can prioritise paying off any debt with the highest interest rates first that you may have. It will help alleviate any financial stress during tough times by reducing your debt and freeing up more funds for your savings.
- You can look to strengthen your position in the job market by increasing your skills and qualifications. This can also enhance your job security as well as your employability. Look for opportunities to upskill or reskill through online courses or training programs – you never know when the time could come to use them.
- Consider diversifying income sources as this can provide additional financial security. Explore freelance work, part-time jobs, or passive income streams like investments where you can. Of course, during an economic downturn, there may be fewer opportunities around, but explore your options to see what is possible.
How To Adapt To Economic Decline?
Adapting to economic decline as a consumer can be tough, but if you’re proactive, you can keep your finances in a good place. Keep an eye on your cash flow by tracking your income and expenses closely. If you can reduce spending by looking at effective ways to save money, you can then keep your savings going and add to your emergency savings as mentioned above.
Don’t hesitate to seek out financial support options available to you, such as government-backed programs or unemployment benefits, which can provide temporary relief. Speak to your creditors too if you have repayments due and are worried about maintaining them – they may be able to help with a repayment plan or by restructuring your loan.
It’s also important to maintain a positive mindset. Whilst it can be difficult when prices are rising and your job security is unstable, things do improve with time when it comes to the economy. It can be useful to keep up to date with economic trends and talking to friends and family about any issues you may be having.
The Importance Of Being Prepared
Being prepared for economic shifts can do wonders for your financial stability and peace of mind. Proactive planning means you can stay resilient and minimise any stress and uncertainty.
It’s all about protecting yourself as much as you can from sudden financial shocks that can easily destabilise your plans, financial goals and budget. Ideally, if you can have many of the strategies mentioned above in place before an economic downturn comes about, you’ll already be one step ahead.
For more financial information and advice, please visit Money Helper which has lots of free resources to help. For more from our blog, you can read all about how to strike a perfect work-life balance, and discover the best budgeting apps that can help you reach your financial goals.
