Official figures show the UK is no longer in recession. But are your finances out of the woods yet - and what is going to happen to taxes, mortgage rates and savings going forward?

The news that the UK is no longer in recession should have raised a cheer from most people. After all, it means we’ve emerged from the longest downturn for a generation – six consecutive months of economic contraction.

According to information provider Datamonitor, consumers are already feeling more confident. Its research found a fall in the number of people reporting their finances are worse off by the end of last year, compared to the start. There was also a marked improvement in consumers’ view of the economy with a 12.5% fall in those expressing a negative view of economic growth.
 
But while confidence may be on the up, is this really justified? Assuming the recession is behind us, will our finances also start to recover – or could there be more financial hardship ahead?

On the face of it, the news is good and people may be feeling a lot more confidence about the future knowing recovery is on the cards.

But in reality this won’t have an immediate impact on most people’s everyday lives – and things could actually get worse not better.

Q: Is the recession really over?

The first thing to bear in mind is it won’t be all plain sailing for the economy from here on in.

Vince Cable, the Liberal Democrat shadow chancellor, says: "The British economy has had the economic equivalent of a heart attack and is still very weak. With both the construction and banking sectors in trouble, we are not out of the woods yet.”

Azad Zangana, European economist at Schroders, believes the UK economy will continue growing, albeit it very slowly. "We are erring on the side of caution and predicting growth of between 1% and 1.1%."

There is also a risk that we might experience a ‘double-dip’ recession, according to Mark Bolsom, head of the UK trading desk at Travelex. “Unfortunately, we forecast a bumpy couple of years for UK consumers and businesses,” he adds.

Q: Will we see a fall in unemployment?

One of the main concerns for many people is job security. Unemployment tends to lag behind recessions, and historically more companies have folded after a recession than during it.

David Birne, a licensed insolvency practitioner at HW Fisher Chartered Accountants, warns that the ‘end’ of the recession could actually be the trigger that puts them out of business.

He explains: "While banks and trade creditors sit tight during recessionary periods for their own financial security, once economic recovery begins they proactively begin to recover their debts and it's this process that tips many companies over the edge.

"The increased bullishness of creditors and lenders translates into increased financial stress for already struggling companies.”

Such a scenario happened in the early 1990s, when more companies folded after the recession than during it.

While we have seen the rate of unemployment slow in recent months, this is mainly because more people are working part-time. Many economists think unemployment will continue to increase this year.

Q: Will pressure on household budgets reduce?

Sadly, this is unlikely. For a start, people’s access to affordable credit remains limited.

Secondly, the economy is still very fragile so, regardless of who wins the general election, we’re likely to see taxes increase – which means more pressure on people’s budgets.

“Whatever the outcome, the next Parliament will be characterised by a major fiscal squeeze and ultra-loose monetary policy,” says Jonathan Loynes, chief economist at Capital Economics.

“A post-election rise in VAT to 20% would be a strong signal of intent to the markets and the credit rating agencies. It would also neatly echo the Conservatives’ post-election Budget of 1979, in which Geoffrey Howe raised VAT from 8% to 15%.”

Cable adds: “The economy remains dependent on artificial money creation and a government running a massive deficit, but with growth of just 0.1%, Tory proposals to immediately slash government spending would be disastrous.”

At the same time, utility bills are still a big burden; the regulator Ofgem recently said that energy prices could spike by 60% over the next 10 years as suppliers invest more money in green technology and infrastructure. The end of the recession is unlikely to alter this path much.

Malcolm Hurlston, chairman of the Consumer Credit Counseling Service, says: "There are still hundreds of thousands of people wondering how they are going to pay their bills over the next year. As the economy improves, we shall still face a scorpion's tail of debt.”

David Harker, chief executive of Citizens Advice, agrees that the impact of the credit crunch on people’s finances won’t disappear overnight. 

“While the rate of growth in the numbers of people coming to see us is starting to slow down, having peaked in early 2009, we are still see seeing significant numbers of clients coming to see us for help,” he adds.

Q: What will happen to interest rates?

For some time, many economists have agreed that the Bank of England will keep interest rates unchanged or low until the final quarter of 2010, but possibly longer.

However, with inflation now starting to rise quicker than expected, the validity of this view is being called into question.

Low interest rates are obviously bad news for savers, especially as rising inflation erodes the value of their money. But even when the central bank does start to increase the base rate, there is no guarantee that savings providers will pass this on to customers.

On the other side of the coin, rising interest rates could be disastrous for many homeowners on tracker and standard variable rate mortgages, who will see their monthly payments rise as well.

It may be that we see the return of payment shock, which could lead to more people falling behind on their repayments and even repossessions. 

Citizens Advice’s Harker says: “We’re are seeing large numbers of people struggling to cope as a result of losing their job or having their pay or hours reduced, in turn leading to difficulties managing loan repayments and pay increasing bills. In some cases people are having to cope with having lost their homes.”

The cost of new mortgages, including fixed-rate deals, are also likely to become more expensive – putting an additional barrier in the way of people trying to get on or move up the ladder.

Q: What should people do?

Because the future is still uncertain, it’s really important that people take action now to ensure their finances are in a good position. So that means paying off debts wherever possible, and trying to build up their savings for emergencies.

If you're keen to get your finances in shape, why not follow Moneywise’s five-step Financial Feelgood plan?
 

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