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Some analysts are forecasting a looming UK recession in 2022. Others are going further and predicting a depression. What are the differences between them and why are these gloomy scenarios being put forward? In this article, our team at Cedar House explains why growth is slowing across the world, the contrasts between a recession and depression and what these might mean for your financial plan. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Recession & depression – an overview
Definitions of a “recession” vary largely depending on your home country. In the US, a recession is declared by eight economists on the Business Cycle Dating Committee when various factors are taken into account (e.g. unemployment rate, wage levels and investment). The UK, conversely, follows the Organisation for Economic Co-operation and Development (OECD) definition of a recession, referring to two consecutive quarters of negative GDP growth (gross domestic product).
What is common across most definitions of a recession, however, is lower job security and increasing unemployment. A depression, however, is often more global in nature (rather than localised) and broadly refers to a longer period of negative GDP growth and high unemployment. In the Great Depression of the 1930s, for instance, the unemployment rate nearly reached 25% at its peak (in recent years it has rarely broken 10%) and the whole period lasted nearly 10 years.
Why is global economic growth slowing?
The global economy has faced a range of challenges in recent years. In early 2020, COVID-19 swept the world and many countries went into lockdown. The result was a fall in economic activity which negatively affected GDP and led to many states (including the UK) injecting costly fiscal stimulus into the economy – racking up huge public debt in the process. When lockdowns lifted later in 2020 and 2021, however, a huge demand bounce resulted – leading, in turn, to a very tight labour market (which is usually inflationary). Even recently in July 2022, there is still a high vacancy rate here in the UK, with 4.2 job vacancies per 100 employee jobs.
China, however, continued to pursue its “Zero Covid” policy throughout this period. As a very important global exporter, this has contributed to widespread supply chain disruptions, making inflation worse (i.e. more scarce goods drive up the price). Early in 2022, moreover, we saw the Russian invasion of Ukraine. Not only was this devastating to people directly involved in the conflict, but the war has also been a huge factor in driving up global commodity prices – e.g. oil and gas, which have a massive knock-on effect in pushing other goods higher up in cost.
Taken together, these factors have resulted in surging inflation in many countries including the UK, the US and those across Europe. Central banks have largely responded by raising interest rates to try and slow down widespread price rises. Slowing GDP growth has been the outcome, with little indication (at present) that inflation and interest rates will fall any time soon.
Implications for financial planning
If Despite this negative picture, it is important to stress that current projections do not indicate that a global depression is imminent. The International Monetary Fund (IMF), for instance, is forecasting 3.2% global economic growth in 2022 and 2.9% growth in 2023. The slowdown will likely come largely from advanced economies (e.g. western countries), but the current wisdom is that a depression is not probable.
Rather, a set of broad alternative scenarios is offered (all of which seem possible). The first is that the international community imposes tighter sanctions on Russian oil exports in the coming months, which would likely drive up commodity prices even further. The second is that Russian oil and gas exports to Europe fall completely to zero by the end of 2022 (e.g. due to European prohibition or Russian curtailment). The third is that inflation remains elevated for some time, whilst the fourth involves increasing tightening of fiscal conditions – e.g. rising interest rates as nations seek to control rising living costs.
A recession in the UK is more plausible at this stage, but not guaranteed. The BoE (Bank of England) is forecasting almost two years of flat or negative GDP growth, during which time unemployment could steadily rise. Whilst these official forecasts cannot be taken as gospel, they do provide useful information when considering what to do with your financial plan:
- Don’t panic. Currently, the data is not forecasting a disaster scenario. Rather, it paints a somewhat negative picture of GDP growth and inflation.
- Stay invested. Speak to your financial planner if you are worried about what may happen to your portfolio in light of current market conditions. Remember, your asset allocation should reflect your overall investment goals and risk tolerance – not trying to outguess the markets.
- Keep a robust protection plan. Maintain an appropriate “rainy day fund” of easy-access cash savings (e.g. 3-6 months’ worth of living costs) and the protection policies you set up with your financial planner. Your life insurance and other policies may be especially important during more challenging economic conditions.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk