The Other R-Rate: Understanding Recession Impacts on Your Finances

How is a recession defined?

In the U.K. a recession is defined as two successive quarters of negative economic growth as measured by the seasonally adjusted quarter-on-quarter figures for Gross Domestic Product (GDP) – this refers to a value placed on a country's goods and services and directly relates to the amount of products and services sold in any given year.

The UK will almost certainly go into recession after the economy suffered a 5.8% drop in March, the first month of coronavirus lockdown. The economy then shrank by a further 20.4% in April as shops and businesses closed and workers were sent home. Following on from March and April’s GDP decline, it means the UK has contracted around a quarter in just two months – this is an unprecedented amount. The Office for National Statistics (ONS) said all areas of the economy were hit, in particular pubs, education, health and car sales.

Financial analysts say that the second quarter (April, May and June) will see a significant decline in GDP. In practical terms, a recession will almost certainly mean redundancies, businesses failing and the Government under huge pressure to help workers get back to normal following the lockdown. The current furlough scheme is due to be rolled back to 60% (currently 80% of salaries) at the end of July and will then cease at the end of October. The questions is, who will then pick up the tab?

In its first official outlook since the coronavirus pandemic began, the Bank of England (BoE) cautioned over a very sharp fall in GDP and a substantial rise in unemployment as it left interest rates at a record low of 0.1%. The BoE has warned of a potential and unprecedented fall in economic output, however, they also said the sharp fall in activity should be temporary and that it should pick up relatively rapidly once lockdown measures are eased.

Recession shapes

V	The economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. V-shapes are the normal shape for recession, as the strength of economic recovery is typically closely related to the severity of the preceding recession.
U	The recession is longer than a V-shaped recession, and has a less-clearly defined trough. GDP may shrink for several quarters, and only slowly return to trend growth.
W	Also known as a double-dip recession, whereby the economy falls then quickly recovers with a short period of growth, then falls back into recession before finally recovering, giving a down up down up pattern resembling the letter W.

Investing during a recession

The main point to remember is that all recessions are temporary, so what comes with it, is also temporary i.e. threat and opportunity.

If you have existing investments, the overwhelming strategy of common sense is to sit tight – ride the waves, not fight them. The question is, for how long, and do you have the time? After all, you only make or lose money when you sell, so if you have the capacity to wait, then wait.

Recessions also represent as much opportunity as they do a threat. So if you are going to invest, why not do it in the sales? Buy cheap, buy low. Everyone loves a bargain and your purchase price is just as important as your selling price if you want to make money.

We know recessions come and go and we also like to say that ‘hindsight is a wonderful thing.’ If you think back to the last recession, ask yourself, would you have done anything different?

If you would like to discuss your portfolio with Dentons Wealth, please speak with one of our Independent Financial Advisers.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.