There is much talk of a recession, both in the US and the UK. But how do we know when we are in recession and how can we learn from the recessions of the past?
Put simply, a recession occurs when there is a decline in a country's real gross domestic product (GDP), or negative real economic growth for two or more successive quarters of a year.
It's strange to think that there is a whole generation who have never known recession, just as some grew up in a period where there were a string of serious recessions and high inflation. The boom years of the 80s were swiftly followed by bust.
The UK's most recent financial hangover
Between 1989 and 1992, Britain's financial hangover was grim as 600,000 homes were repossessed while interest rates rocketed to more than 15% and unemployed doubled, leaving 2.6 million people out of work by 1991 as the economy shrank by 0.4% in three years.
The wild late-80s spending spree came as the country recovered from the 1970s gloom, when there was decline in manufacturing, rise in unemployment and inflation at an incredible 25% (dropping to just 10% in 1990). Although it is easy be dismissive about the suffering of yuppies who had been living the high life during the 80s, in reality the economic low hit millions of ordinary, hard-working families very hard.
The strain showed socially, too, as the divorce rate soared, family homes were sold at a loss, children were shifted into different schools and expensive cars were replaced with cheaper models.
Important differences now
It's important to bear in mind that the build up and backdrop to the 90s recession was very different to our recent economic past. Back then, membership of the Exchange Rate Mechanism locked us into double-digit interest rates for some time until the pound was kicked out of the ERM in September 1992 and rates dropped steadily.
But like our current situation, many people had taken advantage of a new era of credit and lending which allowed them to try and emulate the lifestyles of the wealthy, at that time popularised by Dallas and Dynasty. Tens of thousands over-stretched themselves, taking out big mortgages on large and expensive houses as the property market boomed and materialism gripped the nation. Tim Lott's novel Rumours of a Hurricane captures this excesses and subsequent depression during period very effectively and is well worth reading.
Hard lessons
Despite being 16 years ago, the shock, hardship and dented confidence is still raw for those who were affected.
Ellen King and her family had just moved house and taken on a considerably bigger, albeit manageable, mortgage when the recession began to bite at the end of 1988. "My husband and I were both working full time and everything seemed fine," she recalled.
"We had saved for the move and planned all the costs well ahead so we had no reason to think that we would be under any serious financial strain and once we had moved in and covered initial costs, we expected everything to be rosy, especially with two incomes."
Ellen and her husband did what most people do when they move into a new home and started to decorate. "We had never had credit or spent beyond our means and had not debts other than our mortgage so we were spending money we had rather than borrowing. Even so, when my husband's job came under threat, things got very scary very quickly. In fact it changed almost overnight," she said.
"We always thought that things like this happened to someone else. When he lost his job it was the first time he had been out of work in his life. He immediately started applying for new jobs and it was a great comfort, especially as I was worried about being the main earner. We acted fairly quickly though, cancelling orders we had placed for a new kitchen and putting the plans for the house on hold so that we had no additional demands on our money."
"In the end my husband's career was never the same again. He was out of work again and for a long period of time, which was an ongoing strain on us all. Holidays stopped completely and I had to watch what I put in the trolley at the supermarket for the first time ever. At this point the emphasis had moved from decorating the house to just keeping it. But it all helped. I think the main lessons we learnt were to cut back straight away and save as much as possible as no one knows how long a recession will last."
What you could earn
Whilst you can expect a bumpy ride with the economy and the property market, there could be good news for your long-term investments. "The lessons from the last recession suggest that investors should sit tight and hang onto their shares," said The Share Centre CEO Gavin Oldham. "Looking back, the shocks to the stockmarket which seemed huge then don't look so bad now."
Related links
Focus on the market tumble
How did we end up in this mess?
How to buy or sell in a tough market
Find an independent financial adviser in your area
Make your savings work harder with an ISA
