The phoney recession is over. Now for the real thing.

The troubles of the last few weeks have shown that this financial crisis is only just getting started.

If you know anything about the Second World War, you’ll have heard of the phoney war. That was when Britain and France declared war on Germany in September 1939 and… nothing happened.

That swiftly changed in May 1940, when Germany launched its blitzkrieg on France. After that, things got a bit sticky.

Luckily, we aren’t in a world war now. But we’ve been in a global financial crisis for several years, and following last week’s market meltdown, the phoney part is over.

Once again, things are set to get sticky.

This time it’s serious

Last week, stock markets fell as fast as they did at the height of the 2008 banking crisis. Remember that sickening period when the global economy appeared on the brink of collapse?

Well it’s back. With a vengeance.

Phoney recovery

Last time round, politicians and central bankers threw everything they had at the crisis. They slashed interest rates, cut taxes, bailed out banks, printed money and ramped up spending. Then they printed more money.

And it appeared to work. House prices stabilised. Repossessions and personal insolvencies remained low. People lost their jobs, true, but fewer than expected. Stock markets rebounded. Bankers kept pocketing their massive bonuses, as if nothing had happened.

The recession ended, and the global economy started to grow again.

As we know now, it was a phoney recovery.

Global tragedy

Now all the ammunition has been spent. Interest rates can’t go any lower. Taxpayers are revolting against higher government spending. Printing virtual money, a process known as quantitative easing, appears to have failed.

Our leaders don’t know what to do next. US politics is broken. So is the euro, although EU politicians will destroy the global economy pretending it isn’t.

The debate in the UK has hit a brick wall. Chancellor George Osborne says we should slash government spending, but that will only make our debt pile bigger. Shadow Chancellor Ed Balls claims we should borrow and spend, but that will only make our debt pile bigger.

How bad can things get?

Ask the Greeks.

Keeping it real

I don’t want to belittle the phoney downturn. If you lost your job or your savings have been hammered by low interest rates, it will have felt painfully real.

But this is the real thing. It could get very nasty, although there will be winners as well as losers. Here’s what might happen, and how you can protect yourself.

House prices will fall

Surely the world’s most inflated property market can’t survive this. If you want to buy, don’t burden yourself with a big mortgage. If selling, don’t drive away buyers by being too greedy. If you’re a buy-to-let investor, your time may have come.

Only one thing will stop a property bloodbath...

Interest rates will stay low for longer

Base rates could stay at 0.5% until 2013, and rise only slowly after that. That’s great news for homeowners, especially those with spare equity or a big cash deposit, as they can get the lowest mortgage rates ever. The drawback is that nervous banks will restrict lending borrowers with big deposits and squeaky clean credit records.

If you want a mortgage, make sure you fit the bill.

Inflation will rise

There is only one way Western governments can clear their debts - by deliberately inflating them away. Your income is unlikely to keep pace, and neither is the interest on your savings. If you’re worried, National Savings & Investments’ Index-Linked Savings Certificates could help your investments keep pace with rising prices.

Read This account pays 5.5% on savings - tax-free! for more.

The oil price could fall

There is some good news out there.

If the global economy slows, demand for oil may fall. If so, petrol may get cheaper. This could have a knock-on effect on food prices, cutting the cost of growing and transporting agricultural goods. The danger is that demand from China and other emerging markets could keep prices high.

Your savings are unstable

The big UK banks are said to be well capitalised, but these days, who knows? Make sure you stick within Financial Services Compensation Scheme limits, and don’t deposit more than £85,000 with a single banking group.

Share prices will fall

So will your stocks and shares Isa, and your pension. This doesn’t mean you should sell, if you do so now you are only crystallising your losses. But brace yourself for short-term pain and a slow recovery.

If you’re brave, there may be a great buying opportunity heading our way, as there was in March 2009. The problem is, nobody will know until afterwards.

Annuity rates will fall

Annuity rates are already sliding downwards, as safety-seeking investors pile into government gilts. If you are set to retire and looking to take out an annuity, seek advice now. Rates could get worse.

Be sure to check out How to buy the right annuity.

Debt will be deadly

Debt is killing the West. Don’t let it destroy your finances, repay what you can.

The State won’t provide

The new austerity has only just begun. Pensions, sickness benefits, tax credits, NHS spending and public sector jobs will all be in the firing line, whichever government is in power. You need to take care of yourself.

Your holiday just got cheaper

Be thankful for small mercies. In July, the pound traded as low as €1.10. It recently hit €1.15. For every £500 you take to Europe, you now get an extra €25. Don’t spend it all at once.

You love your job

You’ve been moaning about your boss for years, but now you’re glad to see his face every morning. The crisis will make us grateful for small mercies, such as having a job at all.

This isn’t a war, not even a phoney one, but it is a genuine financial crisis. We’ll get through, but it will be a struggle. Good luck.

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