The UK economy is on dangerous ground. Falling house prices, rising household bills and soaring repossessions paint a bleak picture. Most of us respond to the doom and gloom with a shrug and a decision to forsake the summer holiday. But where some see hardship, others see the chance to make some extra cash.

Here are our top suggestions on how to profit in a downturn.

Buy shares in banks

The sector is still reeling from the global impact of last summer's US sub-prime crisis, which left banks facing a severe liquidity squeeze. Problems at Northern Rock have also dented confidence in other banks, as many use similar, although less risky, funding strategies. Many investors have responded by selling shares in banks, which in turn has made some look relatively cheap now.

TD Waterhouse, the broker, reported that banking stocks accounted for almost three quarters of all trades by retail investors at the end of February - the height of the banks' resultsreporting season - with Royal Bank of Scotland, Lloyds TSB, Barclays and Alliance & Leicester topping its list of retail share buys.

Mark Dampier, head of research at Hargreaves Lansdown, the independent financial adviser, says that a recession as big as the one in the early 1990s has already been priced into bank shares. So if a recession of this size does not happen, Mr Dampier says that “you are likely to be up on the deal”. However, there is still a big risk that it could happen, and if it turns out to be worse than the Nineties downturn, you would lose out. “Buying bank shares at the moment is an act of faith,” Mr Dampier says. “The credit problems are huge and no one is convinced that even bank chief executives know what is going on. Crucially, the best fund managers are not buying UK banking stock because of the high risk levels.”

Mr Dampier says that Barclays, which has a strong investment banking arm, and Lloyds TSB, which has not lent risky mortgages, are safer bets. However, badly hit banks, such as Alliance & Leicester and Bradford & Bingley, should be avoided. “They might not even be around next year,” Mr Dampier says. “If you must invest in banks, buy bonds rather than equities, as these are a safer bet.”

Spread-betting

One million people in the UK have tried spread-betting on movements in world stock markets. Unlike ordinary investing, it is possible to profit from falls as well as rises in stocks and shares, as you earn money from bets on how much you think an index will rise or fall in value.

For instance, a spread-betting company offers a quote that a share will be sold at £2 in a week. You think that the value will be lower and make a bet, “selling” at £10 per penny. For every penny that the end price is below £2, you make £10. If the shares are sold at £1, you will pocket £1,000, but if they are sold at £3, you will lose £1,000. You can place a “stop-loss” so that once the price rises or falls beyond a pre-determined value, the bet ends automatically. Despite such safeguards, spread-betting is extremely risky because you could lose much more than the original investment.

Nevertheless, an economic downturn is prime time to indulge in spread-betting. James Parker, of ODL Markets, the spread-betting company, says: “Investors like to ‘short' the market, by betting on falls, which can be self-fulfilling. Before the credit crunch we saw a lot of shorting in the banking sector. Two clients made money by betting on a fall in Northern Rock shares.”

Beginners' accounts limit risk by setting betting caps, but you can trade with as little as £50.

Buy a house at auction

About 50,000 properties are likely to be repossessed this year, according to the Council of Mortgage Lenders, which means that there will be more cheap property on the market. Melanie Bien, of Savills Private Finance, the mortgage broker, says: “A growing number of repossessed properties are being snapped up at auction as lenders look for a quick sale and borrowers look for bargains.”

The process is straightforward. If you win the bidding on the day, the deal is binding and the property is yours, so you avoid any drawn-out process. You have to put down a deposit, usually 10 per cent, and pay the balance within 28 days, so it is vital to have the finance organised in advance. Ms Bien says: “If you have not spoken to a broker beforehand, you will have to move quickly. The lender will want the property valued, which can take time unless the broker can instruct the valuation.”

However, you need to do your homework first, or you could risk bidding more than the property is worth and the lender could refuse to finance the purchase. You should also have a survey done so that you understand the level of work involved in advance. This may be viewed as a waste of money, but Ms Bien says: “The risk of taking on more problems than you realise is too great.”

Check local newspapers for dates of auctions in the area in which you wish to buy.

Invest in gold

Gold is considered by many as the perfect investment in hard times. There is no risk of default and, unlike money, banks cannot print more.

At the moment, the global supply of gold is falling and demand is on the rise, pushing up the value, which currently stands at $1,000 an ounce. Mr Dampier says: “This sounds high, but the last gold high was in 1980 at $850 an ounce, which in today's money is equivalent to $2,500.”

Investec, which runs the Global Gold Fund, expects a further 70 per cent rise, fuelled by demand from Asian banks and a slowdown in mining. Low interest rates in the US also make the yield on gold look relatively high. Exchange-traded funds, such as iShares COMEX Gold Trust, are the easiest way of buying physical gold, but goldmining funds, such as Investec Global Gold and Merrill Lynch Gold & General, are also worth a look. Up to a third of these funds can be invested in other precious metals, such as platinum.

Negotiate

Sellers of everything, from property to cars, are more open to negotiation during a downturn. If you are buying a house, try to undercut the asking price by up to 10 per cent. The same applies if you are renewing an insurance policy or buying goods. Companies want to retain your business if you are already a customer and prefer to make some revenue rather than none at all. Now is the time to exercise your bargaining power.

Case Study: A Better Bet

Anna Banko, an accountant from London, began spread-betting a year ago because she wanted to develop her knowledge of the stock market. She has made a £200 profit so far, from investments worth no more than £10 each time, mainly from falls in stock market values.

The 39-year-old, left, places a few bets on the Dow Jones industrial average when she gets home from work on a Friday evening. She bets on this index rather than on the London Stock Exchange because New York is a few hours behind, so the stock market is still open when she finishes work.

Ms Banko uses a stop-loss so that she never loses too much money. She says: “I have won some and lost some, but overall I am up on a year ago - and I have earned a much better return than I would have done if I had put my money in a savings account.”