In their latest quarterly Monetary Policy Report, the Bank of England (BoE) confirmed that the UK economy is likely to enter a recession before the end of 2022.
They also predict that the recession is likely to last throughout 2023, and that it will not be until 2024 before we start to see even minimal signs of recovery.
In this article, read about what a recession actually is, how it could affect you, and some practical suggestions about how to manage your finances and investments during the economic downturn.
Economic slowdown has given rise to expectation of a recession
In normal times, the economy of a country grows. Businesses invest to stimulate growth and as their profits rise, wages go up. In turn, the Treasury sees an increase in tax receipts. This then results in more money being available for investment in public services, such as the NHS.
Additionally, because of higher wages and the general sense of national prosperity, you as an individual are more confident and comfortable spending your money.
But sometimes a national economy contracts, usually referred to as a decline in Gross Domestic Product (GDP). A recession is commonly defined as when this happens for two consecutive quarters.
The graph below shows the forecast for annual GDP growth over the coming quarters:
Source: ONS and Bank of England, August 2022 via IGD
As you can see from the chart, the UK economy was, understandably, in severe recession during the pandemic. The recovery in 2021 was swift and dramatic, but now a long period of low or non-existent growth is forecast.
The primary cause of the economic pessimism is the sharp increase in inflation, driven by rising energy prices and disrupted supply chains.
The BoE predicts that UK inflation will rise to more than 13% before the end of the year and, as reported by CNBC, some analysts suggest it could go as high as 22% next year.
What happens in a recession?
During a recession, people spend less money and discretionary spending on luxury goods in particular falls dramatically.
More importantly, businesses struggle and have less money to invest for growth. There is also less public spending, and the government is forced to borrow more, at higher interest rates, to cover the shortfall in tax receipts.
Getting inflation under control is seen as the key factor in getting out of recession, and raising interest rates, and so the cost of borrowing, is the primary method of achieving this.
Managing your finances during a recession
Economic downturn can put pressure on your personal finances. Rising prices mean your money might not go as far, and you may find you have less disposable income each month.
There are some simple steps you can take, however, to help you manage during a recession. These include:
- Making sure you always have a clear idea of your financial position by keeping a close track of your income and outgoings
- Trying to avoid taking on more debt as interest rates are rising, and reducing the amount you owe as far as possible
- Adjusting your spending plans and considering rescheduling any big-ticket purchases, such as buying a new car or expensive holidays, if you can.
Of course, these may not be suitable options for you depending on your personal circumstances. Speak to us if you would like to find out the most appropriate methods in your specific situation.
3 practical investment tips for during a recession
Any economic turbulence can be cause for concern when it comes to managing your investments.
The key thing to remember is that you should always see investing money as a long-term process. Short-term market movement, both up and down, is inevitable and you should try not to let this blow you off course or tempt you into making rash changes to your strategy.
Beyond that, here are three investment tips to bear in mind during periods of uncertainty like this.
- It is important not to panic
One positive sign, from an investment point of view, was that the recent prediction of recession by the BoE did not lead to a massive panic on UK stock markets.
Expert opinion suggests that a recession has already been “priced-in” to stock market performance, so there is no reason to suggest an imminent steep decline in fund and share prices.
It is also important to consider that the UK only makes up around 3% of the global economy, and even in the UK, large companies derive much of their earnings from international sources. This means that any deep recession in the UK may not overly affect UK markets, given that so much of the value in British companies is actually tied up abroad.
- Never forget the power of dividends
The nature of dividends means that they are paid on the number of shares you hold, rather than on the actual share value.
This means that, even if share values are falling, you should still receive a good dividend return each year if your portfolio is structured effectively.
By reinvesting dividend yields and buying further shares, you will also benefit from the effect of compounding, which is essentially growth on growth each year.
- You can reduce downturn risk by diversifying your portfolio
It is always important to avoid home bias (that is, over-investing in your home market) when it comes to your investment strategy.
By over-exposing yourself to names and companies you recognise in your home market, you run the risk of a serious economic downturn in the UK overly harming the value of your portfolio.
So, it is often prudent to diversify your investments across a range of global markets and different asset classes across various sectors and industries.
By doing this, it means you have a range of investment growth opportunities while also having an effective hedge against poor performance in another area of your portfolio.
Get in touch
If you are concerned about how a recession could affect you or need some guidance on how to manage your finances, then please do contact us at DBL Asset Management.
Email email@example.com or call 01625 529 499 to speak to us today.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.