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The UK Officially Enters the Deepest Recession In Recent History – What this Means for your Asset Portfolio

It is now official – the United Kingdom is once again in recession but the question that many will be asking is how long will this last, how deep will the recession hit and ultimately what will it mean for family finances.

With COVID-19 dominating the year to date and is undoubtedly the root cause of the recession, there remain a number of outlying geopolitical and socio-economic factors that have also exacerbated the economic crisis.

Putting aside the terrible human health toll, in this piece we will assess both the origins of the recession and outlook for economic recovery as well as the practical considerations for your financial portfolio and family finances.

Recessions are the Historic Rule and Not the Exception

With the Chancellor of the Exchequer stating the UK’s official recession status this week, many will be deeply anxious about the economic outlook for the nation.

Recessions are nothing new – the severity and depth however of the 2020 ‘Coronavirus Recession’ has caught many off guard and outlook for the global economy remains bleak, despite modest GDP growth in June which could indicate signs of a bounce back to normality.

In short recessions are an economic certainty and have frequently occurred throughout history – until the early 19th century recessions were largely as a result of a major climactic event, crop failure or as a result of war but with the coming of the 20th century, economic recessions were infrequent but deep and often lasted many years. With the coming of the industrial era we also see a significant change in economic behaviour of recessions with a number of frequent but short lived events lasting from two to five economic quarters.

During the 20th century we saw a number of recessions with a range of negative growth points recorded including the post WW1 global slump which saw a worldwide drop of economic output of some -10% to the historic averages of -0.1% to -5% from the 1950’s to the 2008-2009.

What has spooked the global financial community however about this recession is the speed, depth and brevity of the recession to date, with an unprecedented -20% contraction in the UK economy in the last quarter. Few others have been spared and across the world, governments, business and families are looking at what they can do to boost their financial resilience.

Already this year, the so called Coronavirus Recession has eclipsed its nearest rival and for that we need to go back to the 1706 War of Spanish Succession where economic contraction peaked at -15%. Against all historic markers we are entering a period of prolonged economic uncertainty.

The 2020 Recession is a Different Beast – Why we Should be Concerned

Whilst recessions are nothing new, the 2020 global and by proxy the UK recession differs fundamentally to previous benchmarks. Until now many would have benchmarked the global crash of 1931 as the worst global recession in living memory. The 2020 recession has for a number of reasons, all the hallmarks to eclipse this accolade and is already doing so.

Since the turn of the millennium the world has become ever smaller, with a massive surge in demand for aviation, hospitality and FMCG (fast-moving consumer goods) – we have also seen the speed at which the Coronavirus spread in comparison to the SARS outbreak of the early 2000’s given the increase in air travel – the economic mayhem has spread just as quickly as the virus itself, with an immediate result in an unprecedented slump in global hydrocarbon, production, transport and FMCG demand.

Exacerbated by extraneous factors such as the Riyadh – Moscow oil spat, Brexit and travel bans many industries are struggling to kick start economic activity, let alone return to pre-2020 levels of output.

What makes the 2020 recession different is the truly global nature of the recession – in short, no nation is an island and a global bounce back will make unified efforts to overcome the potentially massive job losses as well as spiralling welfare costs and consumer/business credit in the coming months as government aid ends.

It took nearly a decade to overcome the 2008-2009 crash but at this stage it is hard to even predict the length of time that it will take for the UK to recover. One thing is clear is that as government aid to businesses, furlough schemes and universal credit claims comes to an end, we could see continued deep per quarter drops in economic output moving into 2021.

Latter stage twentieth century recession norms include a maximum of five quarters in negative growth – it is too early to tell what the outcome will be but it is in no one’s interest to continue the hardship.

Targeted Government Support & a Regional Economic Strategy – A Cause for Optimism?

The global and UK figures make grim reading indeed but there may be cause for optimism.

The UK has seen not only the highest European death toll but aside Spain, also the highest economic shock with the USA and other developed nations seeing lower minus figures in the second quarter,

As the UK slowly re-opens the economy and with the many economic sectors seeing a cautious growth, the outlook remains broadly positive but given the severity of the Q2 and predicted Q3 results, we must remain conservative in our financial outlook. Furthermore as the government reopened the economy in June we saw an 8.7% bounce back alone, which gives some hope of a swift bounce back.

Once the global race to find a vaccine ends and life continues to settle to a new normal – it is widely anticipated that there will be a steady growth in the global economy but this is still some way off. Therefore a deep but steady recovery is what many are hoping will happen.  As we see from the graph below (courtesy of the BBC & ONS), the economic recovery began in earnest in May.

A targeted government response to sectoral unemployment, reskilling and coupled with practical support for businesses could well support an economic recovery within the coming 4-6 economic quarters. In addition, the introduction of local lockdowns to control regional spikes in infection rates will also go some way to helping the nation as a whole recover but one thing is clear – a prolonged nationwide lockdown will only make things worse.

It is also expected that as furlough schemes end, the third quarter will certainly cause further major economic disruption with anticipated job losses. With the right national and regional strategies, as well as a unified global response there remains an optimistic scope to exit what will be the deepest recession on record within the historic norm of 3-6 quarters of negative economic growth based on historic markers.

Putting the economics aside, the 2020 recession will cause severe hardship to many but there remains some cause for hope as we enter the third and arguably most crucial quarter of the year.

Weathering the Storm –Some Practical Considerations to Safeguard Your Finances

Whilst the economic mayhem ensues, there are some important and practical steps that you can take to ensure your financial health during this troubling time.

Compiled by our expert team of IFAs, Fintuity as the UK’s only online digital Independent Financial Adviser have some tips to help give you a peace of mind.

Pensions Firstly check your pensions portfolio and do not worry, pensions are fairly robust to outside influences. If your pension portfolio that has a high % invested in bonds compared to stock then it is likely it will be less volatile, compared to if it was invested mainly in stocks which is expected to be more volatile and therefore will require a longer period to recover from any downturns.
Insurances Protecting yourself and family from ill health and or death should always be a key concern for everyone, we have seen from the devastation of the pandemic the impact this can have on a family’s finance if you are not covered or have minimum coverage. Income protection insurance is a long term policy designed to help you should you become incapacitated and are unable to work.
Mortgages As with pensions we would suggest that you fully check the terms and conditions & small print of your mortgage products.There are number of ways to help people having difficulties with their mortgages during this pandemic. In March mortgage payment holidays were introduced however if this does not help or is not an option speaking to your existing lender or a mortgage advisor could help find an alternative solution.Mortgages are invariably becoming harder to get especially for first time buyer however a recent lowering of the stamp duty could well help first time buyer enter the housing ladder.Always remember that your home could be repossessed if you do not maintain your repayments.
Investments With the global markets in such flux, it is likely that that your investments could both fluctuate and please ensure that you take expert advice before any investment decision that you are not comfortably taking on your own.Please remember that investment can go up or down and so you can get back less than you had invested.

The Fintuity IFA team would always urge caution and to seek expert advice before making any changes to your financial portfolio

Whilst the economic outlook appears bleak there remains some cause for optimism and the key thing is to not panic into amending your existing or future plans. There remains a lot of support, advice and financial expertise available and at this current time of economic uncertainty gaining the right support is essential,

In Conclusion – Hold the Line to Survive the Coronavirus Recession

It is clear that as we move into the third quarter, both the length and depth of the recession is unclear but it is here to stay for the foreseeable future. The recession is unparalleled in global economic history and it is likely to continue but what is needed from a strategic level is for the government to manage the national  economic response with regional lockdowns whilst individuals, families and business remain calm and adopt a ‘hold the line’ approach of cautious optimism.

With the right advice it is likely that you can have a better chance to weather the storm, at the same time it is likely to be an incredibly difficult time for many across the nation both personally and for our finances

If any predictions are to be made, based on the positive growth in May and June as well as an eye to prior recessions we could cautiously predict an unprecedently deep recession that will get worse before it gets any better but with a 4-6 quarter lifespan before we re-enter economic growth.

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