When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
Spotting a recession in the UK
When the economy starts to sag, many will wonder if there is a recession in the UK or if a recession is just around the corner. How to identify a recession, and how do we survive one?
Big ideas
- A recession is a prolonged economic contraction measured by Gross Domestic Product (GDP), with a decline in two or more quarters. The Purchasing Managers Index (PMI) is vital in predicting recessions.
- A recession is not the end of the world. You just have to be more conservative in your financial allocations and not panic amidst all the hysteria.
- Even if the UK is not in a recession but is experiencing inflation and very slow economic growth, it still requires navigating.
QUOTE
"If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."
The most worrying concern with an economic recession for individuals is unemployment, which can lead to failed mortgage and rental payments. This could even lead to eviction or mortgage default.
However, this is the worst-case scenario, and the UK recession prediction is likely to prove false, as judged by most reports. While inflation rates are high and the economic position is not ideal, the situation is better than most believe.
Staying safe in a recession is a function of staying employed, making conservative financial decisions, and cutting back on excessive expenditure. With some foresight, it’s possible to profit during a recession while everybody else is panicking.
Ultimately, this is how many millionaires and billionaires are made.
However, this is the worst-case scenario, and the UK recession prediction is likely to prove false, as judged by most reports. While inflation rates are high and the economic position is not ideal, the situation is better than most believe.
Staying safe in a recession is a function of staying employed, making conservative financial decisions, and cutting back on excessive expenditure. With some foresight, it’s possible to profit during a recession while everybody else is panicking.
Ultimately, this is how many millionaires and billionaires are made.
Recession meaning (when investing)
A recession is a significant decline in economic activity over a sustained period. It is usually defined as two consecutive quarters (six months) of negative economic growth, measured by a country's GDP.
Many economic indicators, such as employment, production, and consumer spending, decline significantly during a recession. A recession can lead to higher unemployment, lower wages, and decreased economic output. It can also cause reduced business activity, lower corporate profits, and a decline in stock prices.
Historical price charts used in this article are for educational purposes only. Past performance is not a guarantee of future results.
Many economic indicators, such as employment, production, and consumer spending, decline significantly during a recession. A recession can lead to higher unemployment, lower wages, and decreased economic output. It can also cause reduced business activity, lower corporate profits, and a decline in stock prices.
Historical price charts used in this article are for educational purposes only. Past performance is not a guarantee of future results.
Recessions and expansions
Source: Capital GroupRecessions can be caused by a variety of factors, such as a decrease in consumer confidence, a decline in the housing market, a reduction in business investment, or a financial crisis.
Governments and central banks can take actions to try to prevent or mitigate the effects of a recession, such as lowering interest rates, increasing government spending, or providing financial assistance to struggling businesses.
But in times of inflation, higher interest rates are needed, which can cause issues if there are high-interest rates coupled with weak or falling economic growth.
Governments and central banks can take actions to try to prevent or mitigate the effects of a recession, such as lowering interest rates, increasing government spending, or providing financial assistance to struggling businesses.
But in times of inflation, higher interest rates are needed, which can cause issues if there are high-interest rates coupled with weak or falling economic growth.
Recession prediction UK
The consensus opinion is that the UK narrowly avoided a recession in 2022, as measured by GDP. Gross Domestic Product is a measure of the total economic output of a country. While there are three primary ways of calculating GDP, all will arrive at the same figure.
The overall UK economy is still smaller than before the Covid 19 pandemic and will potentially remain this way until the end of 2024. The UK is the only G7 country whose economy is smaller than before the pandemic.
The overall UK economy is still smaller than before the Covid 19 pandemic and will potentially remain this way until the end of 2024. The UK is the only G7 country whose economy is smaller than before the pandemic.
UK services PMI history (5 years)
Previously, the Bank of England issued a UK recession prediction. But recent figures have been better than expected, notably the UK Services PMI (S&P Global/CIPS ) rose to 54.9 in April 2023, the highest in a year and easily above market consensus of 52.9. The PMI is a valuable index for gauging manufacturing and services growth, which impacts overall GDP. A PMI above 50 indicates expansion, while a figure below 50 indicates contraction.
In other words, there was no recession in the UK, at the time. However, the UK has a cost of living crisis and very high inflation. Just because there is no recession in a technical sense does not mean the economy is doing well.
It’s also possible that specific market segments are doing well and increasing GDP while others are struggling to make ends meet. For instance, pharmaceutical companies might record sky-high profits during the pandemic, increasing national GDP. But the overall standard of living for the average household could be in severe decline during the same period.
In other words, there was no recession in the UK, at the time. However, the UK has a cost of living crisis and very high inflation. Just because there is no recession in a technical sense does not mean the economy is doing well.
It’s also possible that specific market segments are doing well and increasing GDP while others are struggling to make ends meet. For instance, pharmaceutical companies might record sky-high profits during the pandemic, increasing national GDP. But the overall standard of living for the average household could be in severe decline during the same period.
Is there a recession in Europe?
Regarding a recession in Europe, the situation is similar to that of the UK. While many analysts had predicted a recession 2022-2023 in the UK and Europe, both have had strong PMI reports. The Eurozone Services PMI (HCOB) expanded to 56.6 in April 2023 from 55 prior and above expectations of 54.5. The data suggests the strongest growth in the services sector since April 2022.
Euro area Services PMI history (5 years)
But the Eurozone is made up of a number of countries, many of which could face a recession. In 2022, the IMF managing director indicated that it was likely that half of the Eurozone countries head into a recession because of the energy crises due to the Russia/Ukraine war.
QUOTE
"Just to give you a sense as to how significant the hit on Europe is, our pre-pandemic projections and our current projections differ by half a trillion euros.
The loss to the European people is quite dramatic.”
The loss to the European people is quite dramatic.”
The IMF managing director even went as far to say that 2023 would be a lot tougher than 2022 due to issues with gas storage. Countries such as Latvia and Estonia have seen 21% and 18% inflation rates, respectively, from January 2022 to January 2023, which is far higher than usual.
The relationship between recession and inflation
Recession and inflation are two economic concepts that are often discussed together, but in ordinary circumstances, they have opposite effects on the economy.
A recession is a period of economic decline characterised by decreased economic growth and activity. During a recession, unemployment may rise, and consumer spending may decrease, leading to decreased demand for goods and services. This decrease in demand can lead to lower prices for goods and services, contributing to deflation, the opposite of inflation.
A recession is a period of economic decline characterised by decreased economic growth and activity. During a recession, unemployment may rise, and consumer spending may decrease, leading to decreased demand for goods and services. This decrease in demand can lead to lower prices for goods and services, contributing to deflation, the opposite of inflation.
Inflation has soared across Europe since the Russian invasion of Ukraine
Source: The GuardianInflation, on the other hand, is the rate at which prices for goods and services increase over time. Inflation can occur when too much money is chasing too few goods, leading to increased demand and higher prices. Several factors, including increases in the money supply, increased government spending, or a decrease in the supply of goods and services, can cause this.
During a recession, inflation may decrease as the demand for goods and services falls, while during economic growth, inflation may increase as the demand for goods and services increases. External factors, such as changes in the global economy or natural disasters, can also influence inflation and recession.
During a recession, inflation may decrease as the demand for goods and services falls, while during economic growth, inflation may increase as the demand for goods and services increases. External factors, such as changes in the global economy or natural disasters, can also influence inflation and recession.
Recession vs depression
A recession and a depression are both significant economic downturns, but they differ in severity and duration. A recession is a significant decline in economic activity, typically defined as two consecutive quarters of negative GDP growth.
During a recession, there is a slowdown in economic activity, and many economic indicators, such as employment, production, and consumer spending, decline. While recessions can be painful for individuals and businesses, they are typically shorter in duration and less severe than depressions.
During a recession, there is a slowdown in economic activity, and many economic indicators, such as employment, production, and consumer spending, decline. While recessions can be painful for individuals and businesses, they are typically shorter in duration and less severe than depressions.
QUOTE
“It’s a recession when your neighbour loses his job; it’s a depression when you lose your own.”
A depression, on the other hand, is a severe and prolonged economic downturn. It is characterised by a significant decline in economic activity and widespread unemployment.
Depressions typically last longer than recessions and are associated with a more significant decline in economic output and a more prolonged period of economic hardship. In a depression, businesses may fail, banks may go bankrupt, and unemployment may remain high for an extended period.
The Great Depression of the 1930s is the most well-known example of a depression. In contrast, more recent recessions include the global financial crisis of 2008-2009 and the COVID-19 pandemic-induced recession of 2020.
Depressions typically last longer than recessions and are associated with a more significant decline in economic output and a more prolonged period of economic hardship. In a depression, businesses may fail, banks may go bankrupt, and unemployment may remain high for an extended period.
The Great Depression of the 1930s is the most well-known example of a depression. In contrast, more recent recessions include the global financial crisis of 2008-2009 and the COVID-19 pandemic-induced recession of 2020.
What exactly happens in a recession?
In a recession, economic activity slows down as businesses reduce hiring, consumers spend less, and investors defer investment projects. Recessionary conditions tend to be characterised by the following:
- Job cuts - businesses will stop hiring or lay off employees in response to lower demand for their goods or services.
- Consumers spend less - fewer jobs and a general sense of uncertainty leads consumers to save more and spend less, which in turn leads to even lower demand for goods and services.
- Less investment - Investors and businesses tend to delay or cancel investments in new capital equipment or projects, lower demand for the goods and services produced by other businesses as well as professionals like accountants and lawyers.
- Falling stock prices - as economic conditions worsen, investors may become more pessimistic about companies' future prospects, leading to a decline in stock prices.
- Falling real estate prices - in some cases, a recession can lead to a decline in real estate prices as demand for housing decreases.
- Bankruptcies and business failures - as economic conditions worsen, some businesses may be unable to continue operating and may file for bankruptcy or go out of business.
Governments and central banks may take actions to try to mitigate the effects of a recession, such as lowering interest rates, increasing government spending, or providing financial assistance to struggling businesses. Despite these efforts, however, recessions can be painful and take a significant toll on individuals and communities.
As many self-made millionaires know and advise, the best time to make wealth is during general economic hardships. This is because there is often increased volatility and more price disparity between assets, which signals opportunity. People are in difficult situations and demand less products and services, meaning there are temporary market inefficiencies that can be taken advantage of.
Of course, most people miss that you can’t thrive during a recession if you start googling about the topic when a recession hits. By then, it’s usually too late. You will need to plan in advance to have sufficient cash reserves stored so you can take advantage.
It helps if you own a property outright or a fixed-income product because this might provide you with the stability you need to make the most out of your cash investments. Here are some potential opportunities to take advantage of during a recession:
It helps if you own a property outright or a fixed-income product because this might provide you with the stability you need to make the most out of your cash investments. Here are some potential opportunities to take advantage of during a recession:
- Invest in the stock market - historically, the stock market tends to recover from recessions over time, presenting opportunities for long-term investors. One strategy is to invest in low-cost index funds that track the performance of the overall market rather than trying to pick individual stocks.
- Invest in real estate - while investing in real estate can be expensive and requires significant knowledge and research, there are several strategies to consider. One is to invest in rental properties and earn income from rent payments. Another is to flip properties by buying them at a low price during a recession and selling them later when the market recovers.
- Start a business - starting a business can be a challenging and risky endeavour, but during a recession, there may be greater demand for cost-effective products and services. Some entrepreneurs have found success by starting businesses that address specific needs during a recession, such as providing affordable healthcare or creating new technology solutions.
- Focus on high-paying industries - certain industries, such as healthcare, technology, and finance, tend to have higher earning potential than others. During a recession, these industries may be more resilient than others, making them a good choice for those looking to build wealth.
- Live frugally and save aggressively - regardless of the economic conditions, living below your means and saving aggressively is key to building wealth. During a recession, avoiding debt and building up an emergency fund is essential to weather any financial storms.
Ultimately, the art of investment and financial freedom is a function of desire, patience, and application. With the amount of information available online (from some of the most successful investors in history), it is possible for anybody to save and invest consistently. But this requires planning, foresight, patience, and the prevention of emotional investing.
If you want access to an extensive list of stocks with zero commissions, Trading 212 can help. Stock investment is the ultimate path to wealth in both growing and contracting economies and the earlier you get started, the more you can make.
If you want access to an extensive list of stocks with zero commissions, Trading 212 can help. Stock investment is the ultimate path to wealth in both growing and contracting economies and the earlier you get started, the more you can make.
Think stagflation, not recession
Technically, there is no recession in the UK. But the global outlook is quite bleak. While many regions (such as the UK and Eurozone) have narrowly avoided a recession due to percent changes in GDP on a monthly basis, other economic factors still cause economic hardship. The triangle of low growth, joblessness, and higher interest rates, is known as “stagflation”.
DEFINITION
Stagflation - an economic cycle characterised by slow growth, a high unemployment rate and high inflation.
This is what many countries are currently facing. In the 12 months leading up to January 2023, the US had a 6% inflation rate, the UK had 8.8%, and Eurozone countries had a 10% average inflation rate. These figures are much higher than the optimal 2% targeted by central banks.
The FTX crash was a wake-up call for many financial investors, as was the recent collapse of Silicon Valley Bank (SVB).
While the crash of SVB is said to be specific to the technology industry, it’s certainly not a positive sign for the US economy. And the US economy is in many regards the centrepiece of Western finance, with most stocks and financial products traded on public exchanges such as the Nasdaq and NYSE.
What happens in the US has ripple effects on global finance, and many warning signs exist.
The FTX crash was a wake-up call for many financial investors, as was the recent collapse of Silicon Valley Bank (SVB).
While the crash of SVB is said to be specific to the technology industry, it’s certainly not a positive sign for the US economy. And the US economy is in many regards the centrepiece of Western finance, with most stocks and financial products traded on public exchanges such as the Nasdaq and NYSE.
What happens in the US has ripple effects on global finance, and many warning signs exist.
Recap
Recessions are measured based on GDP growth in subsequent quarters. Technically, there is no recession in the UK, and it will probably be avoided in 2023 and 2024. However, the actual economic outlook is less reassuring.
Inflation rates are very high globally, and the high-interest rates issued by central banks to counteract this could have unintended consequences. Central banks utilise low-interest rates to prevent a recession but cannot do this with rampant inflation. There is a cost of living crisis in the UK and many parts of the world. The crash of SVB so soon after FTX also poses a concern.
Still, it is possible to make positive investments during economic hardship - people will always need goods and services, and some sectors will always do well. All it takes is a readjustment of financial awareness and to allocate some capital towards different regions of the economy.
And, after all, a recession only lasts for ten months, on average.
Inflation rates are very high globally, and the high-interest rates issued by central banks to counteract this could have unintended consequences. Central banks utilise low-interest rates to prevent a recession but cannot do this with rampant inflation. There is a cost of living crisis in the UK and many parts of the world. The crash of SVB so soon after FTX also poses a concern.
Still, it is possible to make positive investments during economic hardship - people will always need goods and services, and some sectors will always do well. All it takes is a readjustment of financial awareness and to allocate some capital towards different regions of the economy.
And, after all, a recession only lasts for ten months, on average.
FAQ
Q: Who benefits the most during a recession?
It is possible to thrive during a recession, but this is only available to those with big pockets and a stable income - a small percentage of people. Investors can get stocks and financial products at a steep discount during a recession. Private loans can be made with better interest rates because cash is king during a recession, though banks will typically set low interest rates.
Savers can also benefit from a recession. While inflation usually eats away savings, a recession usually corresponds with lower prices for goods and services. Savers can get the most out of their money for general goods and services and investment products.
Savers can also benefit from a recession. While inflation usually eats away savings, a recession usually corresponds with lower prices for goods and services. Savers can get the most out of their money for general goods and services and investment products.
Q: Is it better to have cash or property in a recession?
This question can’t really be answered in isolation. Both are useful to have during a recession. With property, you will likely have a rental income. This is extremely useful because of its stability. One of the biggest issues with a recession is that it results in unemployment, which can harm individuals and households. You may have to sell potentially lucrative financial positions to survive without an income.
Cash is always helpful but is especially valuable in a recession because you will get the most out of it. Overall, it’s best to have cash and property during a downturn. Property to generate a stable income and cash to take advantage of investment opportunities. But the value of the property can decline in a recession, and upkeep also has to be considered.
Ultimately, a diversified portfolio of cash, property, stocks and bonds represents an all-weather approach that stands to work well through recessions and beyond.
Cash is always helpful but is especially valuable in a recession because you will get the most out of it. Overall, it’s best to have cash and property during a downturn. Property to generate a stable income and cash to take advantage of investment opportunities. But the value of the property can decline in a recession, and upkeep also has to be considered.
Ultimately, a diversified portfolio of cash, property, stocks and bonds represents an all-weather approach that stands to work well through recessions and beyond.
Q: What are the first signs of a recession?
There are several indicators that signal an oncoming recession. The first is an overall slowdown in economic output, as measured by the GDP. If the GDP growth rate slows down for two or more consecutive quarters, this can signal that a recession is on the horizon.
Consumer spending is a significant driver of economic growth, so a decline in consumer spending can be an early warning sign of a recession. This may be indicated by decreased retail sales, lower consumer confidence, or reduced spending on discretionary items. Rising unemployment and decreased stock market prices are further signs of a recession.
An inverted yield curve is one of the most reliable market-based signals that a recession could be about to occur. The yield curve becomes inverted when short-term interest rates surpass long-term interest rates. What it shows is investors expect interest rates to be lower in the future than they are now, likely as a consequence of a recession.
Consumer spending is a significant driver of economic growth, so a decline in consumer spending can be an early warning sign of a recession. This may be indicated by decreased retail sales, lower consumer confidence, or reduced spending on discretionary items. Rising unemployment and decreased stock market prices are further signs of a recession.
An inverted yield curve is one of the most reliable market-based signals that a recession could be about to occur. The yield curve becomes inverted when short-term interest rates surpass long-term interest rates. What it shows is investors expect interest rates to be lower in the future than they are now, likely as a consequence of a recession.
Q: Where do you put money during a recession?
Having 3 - 6 months of cash on hand is always useful to prepare for emergencies. This is advice often offered by financial advisors but rarely acted upon by individuals. An emergency fund is helpful to have.
During a recession, bonds and defensive stocks are also good options. Bonds generate a fixed income on your existing money, so you essentially loan your funds for a given project at a specific rate. Defensive stocks have stood the test of time and generated strong dividends. Regardless of what happens to the economy, these defensive stocks will likely thrive and survive.
Another option would be real estate, which produces stable income if rented out. House prices can decline during a recession, making it a potential investment opportunity. In a recession, the money should be placed in safe and secure assets, not volatile and risky ones.
During a recession, bonds and defensive stocks are also good options. Bonds generate a fixed income on your existing money, so you essentially loan your funds for a given project at a specific rate. Defensive stocks have stood the test of time and generated strong dividends. Regardless of what happens to the economy, these defensive stocks will likely thrive and survive.
Another option would be real estate, which produces stable income if rented out. House prices can decline during a recession, making it a potential investment opportunity. In a recession, the money should be placed in safe and secure assets, not volatile and risky ones.
Q: What should you not do in a recession?
The worst thing you can do in a recession is to panic and make impulsive decisions. Ultimately, all recessions end, and you don’t want to have sold all of your investments in a hurry. Generally, these investments will bounce back after the recession and make more of an income.
In a recession, it’s essential to make intelligent financial decisions. Stick to your budget and avoid excessive spending. Remember that if the worst thing happens and you get laid off, governments in developed countries often make financial welfare incentives available.
Above all, avoid the media hype. A recession is not the end of the world; it just means you have to be more innovative in terms of how you spend your time and money.
In a recession, it’s essential to make intelligent financial decisions. Stick to your budget and avoid excessive spending. Remember that if the worst thing happens and you get laid off, governments in developed countries often make financial welfare incentives available.
Above all, avoid the media hype. A recession is not the end of the world; it just means you have to be more innovative in terms of how you spend your time and money.
- Purchasing Managers Index (PMI): A monthly survey that gauges the economic health of the manufacturing and services sectors, providing early clues about future business conditions.
- G7: A group of seven major advanced economies—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—that meet regularly to discuss economic policies.
- IMF (International Monetary Fund): A global organisation that monitors economic developments, offers policy advice, and provides financial support to countries facing balance-of-payments problems.
- FTX: A cryptocurrency exchange that experienced a high-profile collapse, shaking confidence in the broader digital assets market.
- Silicon Valley Bank (SVB): A US bank specialising in lending to technology firms. Its sudden failure raised concerns about the health of financial institutions serving start-up businesses.
