Memories of the 2008 recession and financial crisis are still very fresh in the mind of investors and businesses.
So, the prospect of a recession remains high on the agenda for savers and their financial strategies.
With the economy shrinking and inflation hitting a 40-year high, there are warning signs that recession may be on its way – especially as consumer confidence dips.
According to the Office for National Statistics (ONS), people are spending less and cutting down on car journeys due to high fuel costs as the cost of living begins to bite.
The economy did grow by 0.8 per cent over the first three months of the year, according to the ONS, but shrank by 0.1 per cent in March.
Fears are growing that this could be the start of a new trend which sends the UK into a downward spiral, where GDP shrinks further.
Speaking with the BBC, Paul Dales, chief UK economist at Capital Economics, said the latest figures “suggest the economy had less momentum than we thought even before the full hit from the cost-of-living crisis has been felt”.
As a result, he said that the risk of recession, defined as the economy shrinking for two consecutive months or more was far greater.
The National Institute of Economic and Social Research, a think tank, has warned that the squeeze on household incomes would cause the UK to fall into recession in the final half of 2022.
In fact, by the time you are reading this new ONS figures may indicate that the UK has already entered a recession, but only time will tell.
It is not surprising that many experts are reaching this conclusion, given that the Bank of England has forecast that inflation could reach more than 10 per cent by the end of the year.
Such a sharp increase in prices means that consumers have no option but to spend less, especially as wages are rising at a much slower rate – around three per cent on average annually.
Although the Chancellor has recently announced measures to support the cost of living, including measures to help cushion the impact of higher energy costs, the reality is that these may not prevent the UK from experiencing a recession.
Protecting wealth in a recession
Given the potential for a recession, what can investors and saves do to protect their wealth and weather the storm:
Debt vs cash – Where possible, you should try to pay off any debts or move them to a lower rate of interest if possible and fix any deals that you can. This should allow for sudden or unexpected changes to interest rates. At the same time, it may not hurt to build or bolster existing emergency cash funds to cover unexpected bills. Most experts suggest that savers have at least aside three to six months’ worth of their average expenses put away.
Diversify – During periods of uncertainty, it makes sense to invest your wealth across a wide and diverse portfolio of funds and assets. Investing all of your money in a single place heightens your risk profile and could mean a sudden loss of the majority of your wealth.
Look longer term – Rather than focus on quick, riskier wins, you should adopt a defensive investment style. This involves picking funds and/or savings accounts that are more resilient to change. This might include investments connected to everyday essentials. The potential returns on such investments might be smaller, but they are less likely to experience sudden changes brought on by consumer cutbacks.