Which Financial Institutions will Suffer in a Recession?

Readers Question: Which Financial Institutions are most exposed to a recession in the UK?

A recession in the UK could hit several financial institutions quite hard. This is because of the nature of the current economic downturn which is likely to be focused around the previously booming housing market and service sector. In the 1981 recession, it was mainly manufacturing which suffered from high interest rates and high exchange rates. But, in a future recession, the service sector could be much more affected.

Institutions affected by a recession

Banks. The major UK banks would certainly survive a recession. However, there profits would be reduced. A recession is likely to cause a further rise in bankruptcies, mortgage defaults and loan defaults. Therefore, UK banks would have to write off a lot of bad debts.

Estate Agents. If the UK experiences a recession, it is most likely to come from a significant fall in house prices. This would affect firms related to the housing sector. Estate agents would see a lower turnover of houses and make smaller commissions on declining house prices. Home building firms would probably suffer from a decline in orders.

Share Prices and Shareholders After the recent falls in the stockmarket, it may be that a recession wouldn’t cause a significant further fall in share prices. This is because an economic slowdown has already been built into the lower share prices. However, falling profits would lead to lower dividends. There would also be a fall in profits from share dealing and a decline in some of the ‘bonus payments’ that have characterised recent years.

Who Wouldn’t Much suffer from a recession?

• Insurance firms
• Economists (we can always give various theories for why we are in a recession)