Metis AM
You may have noticed headlines predicting a possible recession in the UK for some time. This is partly because the Bank of England (BoE) has been raising interest rates for the past two years to combat inflation.
Though the economy has eked out marginal growth through most of these interest rate rises, data has revealed that the UK economy fell into recession in the second half of 2023.
The recession could have implications for the BoE base rate over the coming months, which currently stands at a 15-year high of 5.25%.
Read on to discover how the recession might affect interest rates in 2024 and what it could mean for your wealth.
The UK fell into a recession in the second half of 2023
If the economy contracts for two consecutive quarters, this is one metric economists can use to deem a country to be in a recession. Data reported by Reuters shows that the UK experienced this in the second half of 2023. In Q3, Gross Domestic Product contracted by 0.1%, and in Q4 it contracted by 0.3%.
The Q4 contraction was more significant than economists had predicted; the results of a Reuters poll had pointed to an anticipated 0.1% contraction in the final three months of 2023.
The recession could put pressure on the Bank of England to cut interest rates
The BoE has been raising interest rates since December 2021 to combat soaring inflation, but has held its base rate steady at 5.25% since August 2023.
Inflation in the UK peaked at 11.1% in October 2022, and has since fallen to 4%. Data from the Office for National Statistics showed that inflation remained steady at 4% in December 2023 and January 2024.
The fall in inflation has led investors to speculate on a potential interest rate cut during 2024, and the economic data showing that the UK fell into a recession last year added to this expectation.
The interest rate rises seen in recent years are thought to be partly behind the drop in economic output. This is because higher interest rates make borrowing more expensive, causing consumers to spend less, reducing demand. While this can help to reduce inflation, it can also have a knock-on effect on economic output.
So, the BoE now faces a balancing act to ensure inflation continues to fall to its 2% target without risking further economic stagnation. The Guardian reports a 17% probability of an interest rate cut in May, and a 50% probability of a cut in June.
If the BoE does reduce interest rates, this could lead to a reduction in the cost of borrowing, as the base rate is one of the factors that lenders consider when choosing their own interest rates. If you have a fixed-rate mortgage, though, even if the base rate falls, the interest rate on your mortgage won’t change until the end of your current fixed-rate period.
There are some signs that the economy is already recovering from last year’s contraction
Despite the fall in economic activity in 2023, there are some reasons for optimism.
CNN reports that employment rates rose, wages rebounded, and business and consumer confidence was at the level usually seen for a growing economy during the second half of 2023. Moreover, the economy performed much better throughout 2023 than economists feared it might at the start of last year.
Indeed, the report suggests that the recession in the UK could already be over, especially given the prospect of falling inflation and potential interest rate cuts in the coming months.
So, though a recession isn’t good news, there is evidence that the UK economy could recover and return to growth quickly.
Your financial planner can help you protect your wealth from the impact of a recession
Though the word “recession” can sound scary, it’s usually sensible to ignore the noise of the headlines.
Economic underperformance can create volatility on the stock market, as investors grapple with uncertainty and sometimes panic about what could happen next. But, as with most global economic events, this volatility is likely to be temporary.
What’s more, if your portfolio is balanced with investments in a range of asset classes and sectors from across the globe, this can help to mitigate the risk posed by uncertainty on the UK stock market.
The most sensible way to respond at times like these is to focus on your own personal circumstances. Your long-term goals are unlikely to change as a result of the recession, and as such, it’s important not to make rash decisions about changes to your portfolio.
Any changes you make should be based on careful research and long-term potential rather than short-term worry.
If you do have any concerns about how the recession could affect your wealth, we recommend booking a meeting with your financial planner. They can help you to make sense of the headlines and how they could affect you, providing welcome reassurance about your financial plan and your ability to achieve your long-term goals.
Get in touch
If you’re concerned about how economic performance could affect your investments, we can help.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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.
