Economists and financial institutions have been predicting a recession in the UK for several years now. The predictions began during the Covid pandemic and continued through the interest rate rises of the past two years.
Though the economy held its own for some time, data has revealed that the economy did fall into a recession at the end of 2023.
“Recession” can be a scary word to see in the headlines, no matter your personal financial circumstances, but it’s important not to panic. Indeed, there are plenty of reasons for optimism despite the economic contraction of recent months.
Read on to learn how a recession could affect your wealth, and why the recession needn’t be a cause for concern.
A recession can affect your wealth in a few different ways
Generally speaking, there are a few different ways a recession might affect your wealth. Here are three of the most common.
Interest rates can fall
A recession is usually accompanied by low consumer spending, which can reduce demand and cause further losses for businesses. Sometimes when this happens, the Bank of England will lower interest rates to encourage more people to spend.
This can mean that the interest rates available on your cash savings fall, making it more difficult to grow your wealth while simultaneously seeing the spending power of your money drop.
Investments can become volatile
Stock markets are not linked to economies, so they don’t always fall during a recession. However, the uncertainty that accompanies a recession can create volatility for your investments.
As such, you might notice that your portfolio doesn’t perform as well as you’d hoped. This can be especially challenging if you’re approaching or already in retirement and are reliant on your pension fund for your income.
Unemployment tends to rise during recessions
Another result of low consumer spending can be job losses, as businesses attempt to cut costs. If you are reliant on employment for your income, this could pose a threat to your financial security.
Without a job, it’s much harder to save towards your retirement or continue to contribute to your investment portfolio to grow your wealth.
3 excellent reasons not to panic about the recession
Fortunately, there are plenty of reasons for optimism about the economy despite the recession that occurred in the second half of 2023.
1. The recession in 2023 was shallow, and the economy may already be recovering
Even though the UK entered a technical recession in Q3 and Q4 of 2023, the degree of contraction was quite shallow. Reuters reports that the economy shrank by 0.1% in Q3, followed by a 0.3% contraction in Q4.
The good news is that the economy is already showing signs of recovery. The Guardian reports that consumer spending in January created some much-needed growth in the economy of 0.2%. There was also an increase in housebuilding and higher spending on private healthcare, both of which contributed to the economic growth.
The British Chamber of Commerce has also revised its prediction for economic performance upwards. It expects the economy to grow by 0.5% in 2024 and 0.7% in 2025. So, the recession may already be over.
2. Taking a long-term view of your finances can put a recession into perspective
We encourage our clients to take a long-term view of their finances, because we believe this is a key part of making sound financial decisions that support your long-term goals.
This means that, if your wealth does experience any negative implications of the recession, over time, you have the opportunity to recover from this and continue to progress towards your goals.
Taking into consideration the data about the economic growth in January of this year, it seems reasonable to suggest that the recession in 2023 may already be over.
3. A diversified portfolio can help to mitigate the risk of market uncertainty caused by recession
When you build your investment portfolio, diversification is usually a key part of choosing the investments that you will include. Having a range of asset classes, sectors, and locations represented in your portfolio is usually a helpful way to mitigate risk.
It means that if one of your investments underperforms, another may be able to compensate with overperformance. So, if the UK stock market were to be affected by the uncertainty of a recession, for example, investments that you have made in another country’s stock market are less likely to be affected.
So, try not to panic about how the economy could affect your portfolio, since it is only one factor out of many that will drive returns.
Get in touch
If you’re concerned about how economic performance might affect your wealth, we can help.
Please get in touch by emailing us at financial@barwells-wealth.co.uk or by phone on 01273 086 311.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
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.
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