‘The Age Of Turbulence’ - And How To Survive It

Starting to worry about your job? Suddenly having to choose between mortgage payments and a family holiday as the turbulence hitting world markets comes ever nearer to home? Welcome to the economic slowdown.

This slowdown – defined as a slowing in the growth of economic output – is the result of the pressure being felt by millions of consumers struggling with rising interest rates, heftier mortgage bills and pricier household goods.Figures out today are expected to show the British economy slowing from 0.7 per cent to perhaps 0.5 per cent for the last three months of last year.

This is not technically a recession – that requires national output to show negative growth for two consecutive quarters. Most economists believe that growth will weaken still further in coming months – for instance, about 1.8 per cent for this year compared with 3 per cent last year – inflicting much harder times than those to which we have become accustomed.

Paul Dales, at Capital Economics, said: “It is possible to avoid a technical recession but suffer the same consequences. If the economy was to grow very slowly over a long period of time, the fallout could be just as bad as a short, sharp fall.”

As consumers stop spending, many businesses struggle to thrive. This can lead to job losses, which exacerbates the slowdown in spending.

George Buckley, chief UK economist at Deutsche Bank, said: “It’s like a downward spiral. We really are on a knife edge at the moment. If unemployment starts to increase, the ramifications will be pronounced.”

Recent employment figures are positive, however. The Office for National Statistics said that the number of people claiming unemployment benefits had fallen by 11,100 in November to 813,00 representing the lowest level since June 1975.

The most recent economic slowdowns in 2004-05 and 2001 were benign and over fairly quickly, but there is no guarantee how quickly the economy will pick up this time.

Fears of a recession in the US were enough to cause turmoil in the stock markets and an emergency rate cut by the US central bank. Only time will tell whether that will do the trick. If it doesn’t, the impact will be global. Mr Dales said: “The UK economy is quite open and it is certainly affected by what happens overseas – that is part of the reason it is slowing down.”

In the meantime, you can protect yourself against the effects of the slowdown by following our guide:

Keeping your job

Try to understand the difficulties your company is facing in these challenging economic times. Vanessa Robinson, an adviser at the Chartered Institute of Personnel and Development, said: “Be proactive, and ask your boss or do your own research. If you know what the challenges are, you won’t be seen to be heading off in the wrong direction if the company decides it needs to change.” Now is also the time to be positive and enthusiastic.

Investments

Unless you are close to retirement, there is no need to worry, advisers say. Over the long term, the stock market is expected to rise again by enough to cover this week’s losses. However anyone hoping to cash in their shares soon may be better off taking their money out now and switching to safer cash or fixed interest assets in case things get worse.

If you are lucky enough to have spare cash you want to invest, then you could take advantage of the relatively cheap share prices by buying now. Brokers were reporting their busiest day for years yesterday, as canny investors rushed to buy shares.

Mortgages

Anyone struggling with their monthly mortgage bills should consider switching from capital repayments to repaying just the interest on the loan. A lender will charge £50 for the switch, but it could shave hundreds off monthly outgoings. But this should be a short-term measure as failing to resume repaying the capital means your risk not being able to pay off the full loan at the end of term.

Extending the mortgage term, from, for example, 25 to 35 years, will reduce monthly costs too – from £966 a month for a £150,000 loan at a rate of 6 per cent, to £855.

Pensions

Those about to draw their pension will be the hardest hit by this downturn. Most pension funds invest in the stock market, which leaves them especially vulnerable. The insurance analyst Aon Consulting said that the pension funds deficit rose by £15 billion on Monday. Anyone in, or approaching, retirement is advised delay drawing on their pension fund if they can. Nigel Callaghan, of Hargreaves Lansdown, an independent financial adviser, says: “If you have other money you can draw on in the short term, for instance building society savings, or can continue working for a few months more, then do.”

If you are worried about your pension fund, ask for a statement from your provider. Pension companies usually transfer funds out of equities and into safer cash or fixed interest assets five years before retirement. If you want to arrange for this to happen sooner, you should ask your financial adviser.

Savings

Moving savings to an instant access account so that cashflow is available in emergencies is a good idea. Heritable Bank offers a rate of 6.46 per cent on its Easy Access Account on deposits for more than £1,000. For deposits of more than £1, Anglo Irish Bank offers a rate on its easy access account of 6.3 per cent.

Budgeting and debt

The good old solution to higher bills is simple budgeting. The debt charity Credit Action suggests drawing up a list of everything you spend to see if money is going on anything unnecessary. Say goodbye to takeaway coffees, and make your lunch at home instead of buying it at work. Be stricter with yourself and check your direct debits in case you are paying for anything you have forgotten about, such as magazine subscriptions or regular charity donations. If you have debt on credit cards or personal loans, switch to deals with the cheapest interest rates, if you are not already on them, such as a 0 per cent on balance transfers for 15 months on a credit card with either Halifax or Virgin, or a 6.7 per cent loan deal from Money-back Bank.

Insurance

The consumer group Which? says we are wasting thousands of pounds each on unnecessary insurance policies. You may have accidentally doubled up on some kinds of insurance, such as mobile phone or travel, that are offered alongside your current account or credit card. If you have, ditch the most expensive.

Property

Forget striving to ascend the property ladder – homeowners must do all they can in a recession just to stay put.

Property prices are already wobbling, with the least pessimistic commentators predicting stagnant prices for the rest of 2008 and even into 2009. The worst fate, as nervous buyers steer clear in such a downturn, is to become a forced seller.

To ward off a forced sale, all homeowners should, take care with debt. Yolande Barnes, head of research at the estate agent Savills, said: “The less you have, the safer you are from a crisis.”

The strategy of staying put worked for many during the crash of the late 1980s. Ms Barnes said: “There are ways to avoid trading, such as renting out your home if you need to move.”

Luckily, 14 years of upward momentum in prices means that most homeowners have a comfortable cushion of equity. Those who do choose, or need to go to market, can ensure an orderly sale by sensible pricing. Peter Young, of John D Wood, says: “In a bearish housing market, which is what we have now, you should ask for 95 per cent of the perceived price of the property, so that it appears to be good value. Then you can let the market decide on the price.”

First-time buyers may now be in their best position for years. Ms Barnes advises this long-suffering group: “Take advantage of forced sales. Be brave and don’t put it off.”

Beginners glossary

Bear Describing someone as bearish does not mean they are large and hairy, but that they have a cautious and conservative outlook, and are more inclined to be pessimistic. A bear market is characterised by falling share prices and poor returns. Bear times are bad times

Bear squeeze Not a hug from a grizzly, but a slight rise in share prices after they have fallen sharply as traders who have been short selling buy back their positions

Bull market Share prices are consistently rising. Think “bull in a china shop” – excited, but potentially dangerous

Bear market Share prices are consistently falling. Think bear with a sore head – just sort of grumpy

Dead cat bounce When a share rallies after a large fall, before dropping to new lows – just as a cat that falls from a height bounces on the ground when it lands, even though it is dead

Catching a falling knife Buying more shares as the prices slump, in the belief that they may soon rebound. Likely to have the same effect on your wallet as actually catching a falling knife will have on your hand

Correction A misleading term – it sounds minor, but it actually means quite a steep fall in the price of shares

Credit crunch With all this free publicity it could become the name of a biscuit snack. But it refers to the seizure in the money markets caused by the fallout from US sub-prime mortgage customers defaulting on their loan payments. Big banks refused to lend each other money and while some banks hoarded their cash, others were left exposed without enough cash in their pocket. Think Northern Rock

Going long Buying shares in the belief that the price will increase, producing a profit. A bit like buying a Hermès handbag in the hope that it will become a classic commanding a much higher price at auction. This doesn’t always work

Growth recession Not male pattern baldness, but very slow economic growth, which can have a similar effect on consumers as a recession

Hyperinflation When prices go up faster than people can spend their money. If you leave a wheelbarrow of cash in the street, someone steals only the wheelbarrow

Hedging Taking two positions that will offset each other if prices change and so limiting financial risk. In roulette, the ultimate hedge bet is putting your money on red and black – but you are bound to lose half your money. Hedge fund managers are cleverer than that

Negative equity Owing more on your home than it is actually worth. Lots of people who took out mortgages for 100 per cent or more of the value of their properties are in danger of this, especially when house prices fall

Short selling When traders sell shares they don’t yet own as they believe prices will fall and they can buy them back at a lower price. Like selling your laptop to your mate for £1,000. Before you take it round, it breaks. You buy another in a shop for £800 and give it to your mate, making £200

Stagflation Not a beast the Royal Family hunts, but a coalescence of stagnation and inflation – a period of slow growth with high inflation

Sub-prime mortgages Home loans granted to people with troubled credit histories. Those who have missed a few credit card payments are classed as “light” sub-prime, while others who have become bankrupt in the past or who have court judgments against their name for nonpayments of debts are “heavy” sub-prime

Wind up It means something else to humorists, and Jeremy Beadle. In the money world, it means when a company ceases activity with a view to shutting down. It can also refer to ending a pension scheme, or a relationship. If you want to dump someone, “I’d like to wind things up with you” should do it

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