According to the Guardian, as Liz Truss took the keys to 10 Downing Street, figures suggested that the UK could be on the brink of a recession. While her decision to cap energy bills for households may help ease skyrocketing inflation, it hasn’t completely quashed concerns that the UK could slip into a recession by the start of 2023.
If you’re thinking of investing, you may be wondering whether it’s the right time to put your money into the stock market, as the UK– and other countries – potentially face a recession. If you are, you might be surprised to learn that investing in a recession might be something you want to consider.
Read on to find out why, but before we do, we need to look at what a recession is and why Britain may be about to enter one.
A recession is 2 quarters of falling productivity
The definition of a recession is when a country’s Gross Domestic Product (GDP), which is the value of all goods and services produced by a nation, falls for two quarters in a row. Figures from the Office for National Statistics (ONS) show that in Q2 of 2022, GDP in the UK fell by 0.1%.
In August, the Bank of England’s (BoE) governor, Andrew Bailey, told the BBC that the nation’s economy is forecast to shrink in Q4 of 2022. This dovetails into the forementioned Guardian article, which cites figures from S&P 500 Global and the Chartered Institute of Procurement and Supply (CIPS) that reveals a “severe and accelerated” decline in manufacturing output in August.
It also reported “weaker activity” by the service sector, which suggests that the UK may be on the brink of recession. Let’s look at why a recession might be on the horizon next.
Covid and the war in Ukraine means the economy is volatile
In the wake of the Covid pandemic, many countries suffered supply chain issues and soaring energy prices, which resulted in skyrocketing inflation. This has been made worse by Russia’s invasion of Ukraine, which pushed energy prices and inflation rates up higher.
Figures from the ONS reveals that UK inflation stood at 9.9% in August. While low levels of inflation are seen as a sign of a healthy economy, high inflation can reduce economic growth because of spiralling prices.
In a bid to bring inflation under control, the BoE increased its interest rate to 2.25% in September, the highest level since 2008, the highest level since 2008. This increase, together with inflation, has resulted in fears that the UK, along with the rest of the world, could be heading towards recession.
That said, Reuters reveals that prime minister Liz Truss’s decision to cap energy bills at £2,500 could help the Bank bring inflation under control. Whether this will be enough to sidestep a recession remains to be seen.
An uncertain economy may be an investment opportunity
If a recession becomes a reality, it will probably affect household earnings, employment and company profits. This in turn could result in even more uncertainty for the stock market, which could result in a roller coaster ride for investors.
If you are considering investing, or already have money invested, you might be wondering what this means. While on the face of it the prospect of an uncertain stock market may sound like bad news, it might also offer opportunity.
This is because investing is usually about buying as many units for as little as possible, as this helps increase growth potential. If a recession results in a stock market downturn, the amount you pay to invest could drop significantly, which might mean it’s something you want to consider.
To demonstrate this, you may want to consider the following. If the price of an investment unit is £2 in a robust market, a £10,000 investment buys you 5,000 units. If the value of the unit then rises to £2.50, your investment is worth £12,500, providing a profit of £2,500.
If you had purchased the units in a falling market when each unit was priced at £1, your £10,000 investment would have bought 10,000 units. As such, if the price of each unit then increased to £2.50, your investment would be worth £25,000 – giving you a profit of £15,000, a six-fold increase in returns.
The fear of losses could mean a missed opportunity
It’s common for investors to become nervous when the market becomes jittery and put off investing, despite the fact it may offer greater growth potential.
One way to overcome this and make the most of the opportunity presented by a volatile market might be to speak to a financial planner. They will be able to confirm whether investing is the right strategy for you, the risks and potential benefits involved, and how to increase your chances of success.
For example, seeing your investment as a long-term venture could help reduce the chances of losses. While you should never invest for less than five years, research by Nutmeg found that holding an investment for 13 years or more reduces the probability of loss to almost zero.
Get in touch
If you are considering investing as a way to make your money potentially work harder, and would like to discuss the pros and cons of doing so now, we’d be happy to discuss your options. Please contact us on info@janesmithfinancial.com or call 01234 713131.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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