Metis AM
Threats of a UK recession have been building over the past few months as the UK economy struggled against the cost of living crisis and rising inflation. You might have noticed that some of the characteristics of a recession have started to appear, and Reuters has reported economists’ predictions of a recession in the near future.
But if the UK does experience a recession, how long might it last? And what can you do to make sure it has the smallest possible impact on your wealth? Read on to find out.
A recession starts when the economy contracts for two consecutive quarters
Two consecutive quarters of negative Gross Domestic Product (GDP) is one of the key indicators that the country is in recession. This is usually accompanied by rising unemployment and a slow in the growth of wages, meaning some people might struggle to cover the cost of everyday items.
The BBC reports that the economy contracted by 0.3% between August and October 2022. If a further contraction is recorded for Q4 of 2022, the UK will be in recession.
The UK recession is expected to last until 2024
The Office for Budget Responsibility (OBR) published a report in November 2022 explaining the factors that had played a part in the cost of living crisis and the likely outlook for the economy in 2023.
Here are some of the key points from the report.
- The conflict in Ukraine has had a significant impact on food and energy prices, which have been a primary driver of the rise in inflation.
- The OBR believes that Consumer Price Index (CPI) inflation peaked at 11% in Q4 of 2022, the highest it has been in over 40 years. This would have been 2.5% higher if the government had not implemented its energy price guarantee until April 2023.
- Inflation is expected to drop sharply in 2023 and could dip below zero by 2025 as food and energy prices fall from their record highs. The OBR expects inflation to return to the 2% target in 2027.
- The OBR has predicted that the UK will remain in a recession until 2024.
- GDP is expected to fall by 2% from its highest to lowest point over the course of the recession, which is predicted to last for just over one year from Q3 of 2022. GDP is expected to grow in 2024 and output is likely to return to its pre-pandemic level in Q4 of that year.
Practical steps for recession-proofing your finances
Even though a recession can be worrying, there are a few things you can do to reduce its impact on your own finances.
Reduce debts
As interest rates rise, borrowing becomes more expensive, particularly on credit cards which often carry high interest rates. If you maintain a balance rather than paying off your card every month it could be costing you more than you realise.
To illustrate this, MoneySavingExpert explains that if you have £1,000 sitting in a savings account earning 1% interest, you’re only making £10 a year. If you have £1,000 on a credit card at 18% interest, you’ll be paying £180 a year.
So, in this example, if you use your savings to pay off the debt, you will be £170 a year better off.
Take out the right level of cover
Even though it may be tempting to cancel things like your income protection or critical illness policies to free up extra cash, think about how you and your family might manage if you were unable to work due to illness or injury.
Having peace of mind that you could cover your essential bills even if your income was lower or stopped for a period of time is especially useful during a recession or times of high inflation.
Take a long-term view on your investments
Market volatility is part and parcel of investing in the stock market. Even though it can be scary to see the value of your investments fall, as they sometimes do during a recession, remember that staying the course means you are more likely to benefit from a market recovery later on.
If you were to move your wealth from your investment portfolio into cash, you would not only miss the opportunity to benefit from a market recovery, but your money could also fall in real terms value due to inflation outstripping the majority of savings account interest rates.
Take income from alternative sources in the short term
If you are already in retirement, you might be feeling concerned about how the recession could affect the income you are able to take from your pension.
If this is the case, it could be useful to review all of your savings and investments to see if you could draw an income from an alternative source. This means you could leave your pension invested for longer, giving your portfolio more opportunities to recover.
Once conditions improve, if you want to be sure you have a guaranteed annual income, an annuity might be a good option to explore. An annuity is a guaranteed annual income, either for the rest of your life or for the term of the annuity, that you buy using a lump sum from your pension.
Some annuities are inflation-linked, meaning the annual income you receive will rise in line with inflation each year. This could give you peace of mind that your annual income wouldn’t change even during future periods of uncertainty or market volatility.
Get in touch
If you’d like help growing your wealth and keeping it safe during the cost of living crisis, please get in touch with us. Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
