surviving the recession

The Guardian newspaper has a story today about a survey that shows one in three firms operating a pay freeze. The businesses justify this as an attempt to preserve jobs even when the firm itself is in a profitable part of the economy. Some unfortunate people are on their second year of frozen pay.

What should you do if you have had to accept a pay freeze? The only thing to be done is to try to cut outgoings, especially debt. The interest on the debt becomes ever more burdensome in deflationary situations were wages don’t rise. It means that natural income progression can’t minimise the problem with time. The only way to give yourself a payrise in these circumstances is to cut your debts. Initially it will seem tough, but as the debt falls away, you should be able to negotiate lower interest rates on the remainder, and hence cut your outgoings.

The trouble is that while people were enthusiastically paying down debt in the first half of the year, they now seem to be tired of making the effort and are back to hoping that “something will turn up”. However I believe that the deflationary wage freeze world is here for some time (perhaps two more years). So the only way to get a bit of relief into the situation is tackle the debt now. I know I sound a bit like a broken record harping on the same topic endlessly, but there it is.

In my last post, I mentioned that Japan, Germany and France were out of recession. Now it looks like the UK might be out too, judging from the lift in business confidence.

It sounds strange, but households need to prepare for the end of the recession. While the recession has been harsh to those who have lost their jobs, the low interest rates have been great for those still in work. However, with the end of the recession, interest rates will rise again. Mortgages and other debt will again be harder to service. If you have any debt at all, now is the time to take action, to settle credit card debts, overpay your mortgage, sort out your finances.

Just to illustrate the possible shock people will get when interest rates rise - the Bank of England base rate is now 0.5%, with most variable mortgage rates at 2%. If base rates go up to 4% (the norm), then your mortgage interest rate will go to 5.5% if you are on a variable mortgage. That means that if you have a mortgage of £100,000, your interest payments jump from £166.67 per month to £458.33 per month. Can you find the extra £291.66 per month? If not, now is the time to pay that mortgage down, so you won’t be paying so much interest. If the arrangement fees on fixed rate mortgages were more reasonable, getting a fixed rate mortgage would also be a solution. But as it stands, the fees are so high, you end up paying the same as on a variable rate. The only solution is to overpay the mortgage to bring the down debt outstanding.

Today came the news that Japan has emerged from recession, following closely on Germany and France coming out of recession. Australia emerged from recession in the first quarter.

So is it all over? I’m not so sure. I think that what we’ve seen is an inventory correction. Retailers panicked in the last quarter of 2008 and first quarter of 2009 and stopped ordering new stock, and hastily sold what they had in massive sales. They didn’t want to get caught with stock they couldn’t sell. Therefore Japan and Germany, both large exporters, had a severe contraction in Q408.

But since then, retailers are carefully restocking. And that’s why we’ve seen Japan and Germany rebound. But will the rebound last? Only if there is sustained restocking by retailers. I’m not altogether sure there will be sustained restocking. Unemployment in the USA is still climbing, and the USA remains the engine of world growth. If their people can’t afford to buy much, then growth in Germany and Japan will stall. It’s not over yet in my opinion.

There are more and more stories online about people being harassed by debt collectors, despite the fact that laws are in place to protect vulnerable individuals from being frightened to death.

What should you do if you are in this situation? The best way to protect yourself from debt collectors, is to get in touch with one of the debt charities such as Consumer Credit Counselling. They should be able to inform you of your rights, and in some cases, will negotiate and deal with the debt collectors on your behalf, so that the personal harassment stops.

Many people don’t get help because they are ashamed, but the debt charities are completely confidential and they are free, so avail yourself of their help. 

We’ve has lots of instances of employers asking employees to take a pay cut or unpaid leave in order to cut costs and save jobs. British Airways announced that a lot of their staff had volunteered for the unpaid leave option, and British Telecom has announced that their staff are also going to take a 5% paycut in the form of unpaid leave.

These kinds of situations leave the employee between a rock and a hard place. On the one hand it’s better to have a job at lower pay than no job at all. On the other hand, these things have been tried by desperate companies before, and you end up with lower pay for a while, and then the company goes bust, and your redundancy payment is based on the lower pay. So you lose out even worse.

What should you do in this situation? Well good employees will get jobs no matter what the situation is. So if your company has asked you to take a pay cut, you may feel you have to agree, but then get out your CV and start seeing if you can apply for jobs at your old rate of pay or better.

Also use the unpaid leave to start earning a new second stream of income, whether it is working part-time in a bar or earning online. The fact is that in these days of recession, you can’t rely on any employer at all. It won’t be long before we are all self-employed at this rate.