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Surviving a downturn

We haven't had a recession since the early Nineties. A few clicks can help cushion a fall in your bank balance, says Alison Brace.

Recession, or at least the prospect of it, is dominating the news. Economists are having a field day as the financial world has not seen this kind of rollercoaster for about 18 years.

Economics teachers know what subprime and collaterised debt obligation are, and no doubt are debating them with their pupils and colleagues with as much zeal as the media pundits.

But spare a thought for the rest of us who struggle with the lexicon of an economic downturn. What does it all mean? How did we get here? And what should you do if financial forecasts become even bleaker?

Firstly, the basics. In case you hadn't cottoned on, we are not in a recession and we are not likely to be for some time, if ever. Officially, a recession is a decline in a country's gross domestic product (GDP), for two or more successive quarters of the financial year. The last one in the UK was in 1990-92.

GDP, if you're struggling, is the total market value of all goods and services produced within a country in a given period of time. If this is not increasing, then this is known as negative economic growth. Britain has downgraded its GDP forecast for growth in 2008 and Mervyn King, the governor of the Bank of England, has warned us that we should brace ourselves for a tough 12 months.

In other words, he anticipates that we won't be making and selling as much as anticipated this year, which means the country makes less money. Fewer people are employed, and we tighten our purse strings.

So how did we get ourselves in this position? Well, it all started with those subprime mortgages in America. The market for these loans - offered to those with poor credit history who wouldn't otherwise secure a home loan - collapsed last year.

These debts had been packaged up and sold to financial institutions around the world - a process known as collaterised debt obligation.

The subprime crisis led to plunging property prices in the US, a slowdown in the US economy and billions in bank losses. Hence, financial houses around the world are no longer quite so keen to hand out easy credit.

With the near-collapse of Northern Rock in the UK, a rogue French trader playing with billions in Paris, and the US central bank making an emergency interest rate cut, it's no wonder the markets are jittery.

Combine that with rising energy prices and grocery bills here, a stagnant housing market and British consumers owing more than pound;1.3 trillion on credit cards, mortgages and loans, and there's only one thing to do - batten down the hatches.

On the mortgage front, market woes could even spell good news for homeowners. Copying the US Federal Reserve and cutting interest rates in the UK would lower monthly mortgage payments.

Nearly three million homeowners fear they will have their homes repossessed this year, according to www.moneysupermarket.com. But the credit crunch will make it harder to remortgage at a competitive rate. So if you think you're heading for trouble, then talk to your mortgage lender. If you're struggling, then you could extend the period of your mortgage, or switch to an "interest only" option for a short period.

But perhaps the best thing you could do is invest time in your own financial welfare, says Andrew Hagger of moneyfacts.co.uk. If you have a credit card, switch any outstanding balances to a better deal, he says. That, given the current climate, could be trickier than before, so make sure your credit file is correct. See www.experian.co.uk.

Then check you are getting the best deals on utility bills and insurance. Look at comparison websites such as simplyswitch.com and moneysupermarket.com.

"If offered the possibility of improving your bank balance to the tune of a few hundred pounds for a couple of hours' work, I'm sure most people jump at the chance," says Andrew. "But it's surprising how many can't be bothered to switch from uncompetitive banking, insurance and utilities products."

Make sure you do. It might just preserve your financial wellbeing on the rocky road ahead.

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