Follow this topicFollow this topic Knowledge » The economy

When the recovery comes, you better be ready for it

Harvey Jones
by Lovemoney Staff Harvey Jones on 08 January 2013  |  Comments 6 comments

For some people, the economic recovery could be just as dangerous as the slump.

When the recovery comes, you better be ready for it

There are times when it feels like the financial crisis is going to last forever, but it won’t. At some point, the slide will stop, the recovery will come. It may take longer than we would like, but it will happen. And when it does, all sorts of strange things could happen, taking many of us by surprise.

Just the job

So what might any recovery look like? On the whole, a lot nicer than what we’ve got now. Finding a job should become easier. So will keeping your existing job. One day, you might even get a halfway decent pay rise. If things go really swimmingly, you might even get an inflation-busting pay rise (remember them?).

Well, we can dream, can’t we?

That will be good news for jobseekers, recent graduates, workers in struggling companies or people clinging gratefully onto their dreary old job because something is better than nothing.

But it won’t all be good news.

Shock doctrine

When the economy finally recovers, something shocking will happen. The Bank of England will start increasing base rates from their historic low of 0.5%.

Base rates have been so low for so long that we are beginning to act like they will last forever. But they won’t. And when they start rising, they could rise a lot faster than you think.

Remember how quickly they were slashed during the financial crisis? Then imagine that process in reverse.

This could lead to a massive payment shock for any homeowner with a tracker or variable rate mortgage. It would be a particular shock for somebody sitting on a pricey standard variable rate (SVR), who may already be paying anything between 4% and 6%.

If you’re paying that much when base rates are 0.5%, imagine what you would be paying if base rates return to their historical average of around 5%.

Especially since lenders are at liberty to hike their SVRs at a faster lick than base rates.

Many of us could quickly end up paying double digit mortgage rates. Talk about a payment shock.

It’s not going to happen yet, but it will.

Are you ready for that?

Repo men

If that does happen, we might see a sudden surge in property repossessions, something we have been spared so far. Mortgage lenders may be faster to take possession, as they will feel more confident of getting their money back by flogging off the property in a more buoyant market.

For hard-up homeowners, the recovery could have a sting in the tail.

Thankfully, many have already realised this. Homeowners paid down another £8 billion of mortgage debt in the three months to September, the 18th consecutive quarterly injection of equity, according to Bank of England figures. The more you can reduce your mortgage before rates start rising, the better. Read more in Overpay your mortgage and save thousands.

When we begin to see more solid signs of a recovery, you might also want to switch to a long-term fixed rate as fast as you can, before they start getting more expensive.

Savers saved

If anybody should celebrate a recovery, it will be savers. They have been getting a rotten return on their money for the past four years, as central bankers driving down base rates to bail out borrowers.

When that first base rate finally comes, they should throw a street party. Unless they have just locked into a five-year savings bond paying a measly 2.5%, in which case they will be serving tea and arsenic.

When we finally see signs that the economy is picking up, it may be worth keeping your savings on instant access, so you are ready to cash in. And be prepared to switch savings account regularly, to take advantage of the stream of new savings products that should hit the market to cash in on savers’ euphoria.

Savers might have to wait a few more years before this happens, but one day, their nightmare will end.

I hope they’re ready. The surprise could kill them.

Inflation nation

As far as I can see, the only way the UK will ever be able to reduce our mountain of debt is to inflate it away. Isn’t that the unspoken assumption behind quantitative easing, the Bank of England’s controversial programme of virtual money printing?

At 2.7%, as measured by the consumer prices index, inflation has remained stubbornly over the Bank’s target of 2% for years. Once the economy recovers, inflation could catch fire.

If that happens, prices could outstrip wages, and interest rates could rise even faster than expected, upping the pressure on all of our wallets.

I’m not sure any of us will be ready for that. But again, paying down your debts and cutting spending obligations could help.

The rate we’re in

Higher inflation will be particularly tough on pensioners, especially those who have recently bought an annuity, the income for life you buy with your pension.

Annuity rates have crashed around 20% since 2008, thanks to falling interest rates and gilt yields. The one million pensioners who have bought an annuity since the crisis will get 20% less income for the rest of their life.

They have a right to be angry. They’ll be even angrier when interest rates and inflation start rising.

Decisions, decisions

Many people have put off buying their annuity in the hope that things would get better, only to see rates worsen. If you are set to retire in the next two to three years, you have a tough decision to make.

It is bad enough locking in when rates are falling, even worse when they are finally starting to rise. If the recovery is bedding in by the time you retire, you might want to wait.

You do have some flexibility. You don’t have to buy all your annuity in one go. You could use half your pension to buy an annuity, and hold back the other half in case things get better.

Alternatively, if you got a fairly big pension pot, you could leave it invested and live off the income, while hoping it will rise in value if the recovery takes stock markets with it.

You might need to take specialist pensions advice for this one.

These things time

Maybe I’m running ahead of myself. The recovery is still some way off. In fact, we might have to endure a triple-dip recession first. But things have to get better at some point.

Just make sure you are ready for it when it comes. Because for some, the recovery could prove almost as big a shock as the slump.

More from Lovemoney

Bank of England admits Funding for Lending to blame for dismal savings rates

The OFT to investigate workplace pensions

Cost of playing National Lottery to double

HMRC crackdown on tax-dodging top earners

Enjoyed this? Show it some love


Comments (6)

  • Arblaster
    Love rating 43
    Arblaster said

    You missed something, Harvey:

    "When all else fails, they take you to war."

    Report on 09 January 2013  |  Love thisLove  0 loves
  • nickpike
    Love rating 308
    nickpike said

    What recovery?

    This thing hasn't even started yet.

    Still, when it all finally breaks, you'll be able to swap a house for a bag of chips.

    Report on 18 January 2013  |  Love thisLove  0 loves
  • Mike10613
    Love rating 626
    Mike10613 said

    Interesting analysis. Gilt prices in the markets will also crash as interest rates rise. 'Safe havens' will no longer be safe as investors take more risks. Overpriced blue chips will not be quite as sought after as they are now. Some companies who are struggling now will suddenly realise they survived and their competition didn't and make the most of it. Even your local pub, if it's the only one left that survived the coalition will be able to put a surcharge on it's ale.

    Report on 18 January 2013  |  Love thisLove  0 loves
  • electricblue
    Love rating 769
    electricblue said

    Every manufacturing business I deal with is absolutely pulled out with orders and I've had the busiest end to a year and start of a new one ever in all my many years in sales. My local MP was at a business meeting recently and out of 20 business owners present, 18 were very busy and with full order books. The usual Socialist doom mongers at the meeting wanted to only focus on the two businesses in trouble. If we continue to pull production away from China and back to Europe and the USA as is happening, the recovery will continue to grow. I had a delivery from TNT last week and the driver was on his third run of the day whilst he normally only had one run on my route. Every sign of a recovery is there if you talk to people who are actually connected with manufacturing and industry.

    Report on 18 January 2013  |  Love thisLove  0 loves
  • babyhk
    Love rating 10
    babyhk said

    Most people survive though hard work. My friend has lost her job twice and now has started her own domestic cleaning business which is something she never ever contemplated doing.

    There are plenty of winners in this country but the media never seems to like them.

    Plenty of businesses will survive by vulture like tactics. Take HMV - stores about to close. News reports moan that they no longer will accept vouchers or coupons.

    Pounce ... in come Asda and Tesco who will happily take them.

    Comet recently closing. All the public were bothered about was the lack of discounted electrical goods as we foolishly drove to the nearest out of town store at the crack of dawn.

    What a shame we all cry but did we use these stores?

    Positives are that people become more frugal. Rethink lifestyles ,maybe help others.

    Not all bad when the majority of us will or have children who have to pick up the pieces of our greed.

    Report on 19 January 2013  |  Love thisLove  1 love
  • DLZ
    Love rating 18
    DLZ said

    Japan... interest rates docile at 0.01%... lost decade (it's really two by now)... I'd be surprised to see the recovery come rushing back, but it doesn't mean that we shouldn't get busy and try. In all likelihood it's going to be a long rocky road. The other reason is that the growth figures that matter are masked by increased utility and raw material prices - all the sectors that matter have a long way to go yet to get back to where they before the crisis, if that's realistic, or even desirable.

    Report on 28 February 2013  |  Love thisLove  0 loves

Post a comment

Sign in or register to post a reply.

Our top deals

Credit card
Balance transfers rate and period Representative

Barclaycard 31Mth Platinum Visa

0% for 31 months (2.99% fee) Representative 18.9% APR (variable) Apply
Representative example: Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 18.9% (variable), representative 18.9% APR (variable). Credit available subject to status. A Balance Transfer fee of 3.5% will be applied, then reduced to 2.99% by a refund (terms and conditions apply). Plus an additional £20 fee refund on balance transfers over £2000.

Barclaycard 30Mth Platinum Visa

0% for 30 months (2.89% fee) Representative 18.9% APR (variable) Apply
Representative example: Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 18.9% (variable), representative 18.9% APR (variable). Credit available subject to status. A Balance Transfer fee of 3.5% will be applied, then reduced to 2.89% by a refund (terms and conditions apply). Plus an additional £20 fee refund on balance transfers over £2000.

MBNA 30Mth Platinum Credit Card Visa

0% for 30 months (2.89% fee) Representative 18.9% APR (variable) Apply
Representative example: Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 18.9% (variable), representative 18.9% APR (variable). Credit available subject to status.
W3C  Thank you for using One Flew Over the Cuckoo's Nest