It’s been announced today (12th August 2020) that the UK has entered a recession for the first time in 11 years. So what exactly does that mean?
What is a recession?
In normal times, a country’s economy grows. The people, on average, become slightly richer as the value of the goods and services it produces increases. The measurement of the country’s growth is otherwise known as GDP or Gross Domestic Product. However, sometimes the value of goods and services produced falls and if this happens for two successive quarters (three month periods), this is known as a recession.
Why does it matter if there is a recession?
Economic growth is generally a positive thing for most people, as it usually means there are more jobs, companies are doing well and can therefore pay their employees and shareholders more.
If the economy is growing, this should also mean that the government will receive more money in taxes…which can potentially lead to the government cutting taxes and/or spending more on benefits and public services.
As you’ve probably guessed, when the economy shrinks, everything moves into reverse.
What pushed the UK into recession?
Well, obviously the Covid 19 pandemic and lockdown!
UK GDP fell by 2.2% in the first quarter of 2020 (January to March), as the country and the economy began to feel the effects of lockdown. The figures that have just been announced for the second quarter (April to June) showed the steepest fall on record, of 20.4%, as the lockdown brought many areas of the economy to a complete standstill. Those two quarters in a row of falling GDP mean that the UK is in a recession.
How could a recession affect me?
When a country enters recession, people may lose their jobs, or find it harder to get promotions or pay rises. Those looking for their first job, such as school leavers, may also struggle.
The Bank of England has said the UK economic slump will be less severe than expected, but the road to recovery will take longer. It expects the economy to shrink 9.5% this year, compared with an earlier estimate of 14%. So although not ideal, this is better than expected.
However, the impact of a recession is typically not felt equally across society, depending on an individual’s circumstances. As an example, many UK homeowners who kept their jobs during the last recession in 2009 were broadly okay. Mortgage interest payments fell considerably for many on them, leaving them with more money in the bank to spend or save.
Others, such as benefit recipients or public sector workers, didn’t fare as well.
When will the recession end?
The Bank of England predicts the UK economy will grow in the third quarter of 2020, so, according to the official definition, the recession may already be over! However, it will take some time to experience the worst effects as things such as increasing unemployment are only just beginning to appear.
If all the businesses which shut during the pandemic reopen quickly, the consequences would be less severe. However the unknowns that may hinder recovery are the future spread of Covid 19 and second and subsequent spikes and, of course, people may not have the confidence to travel and venture out to use services such as shops and restaurants.
This is the reason Rishi Sunak has introduced schemes such as “Eat Out to Help Out” to encourage the public to begin to use services again with reduced bills!
Will this impact my investments?
Put very simply, the economy is not the stock market…..and the stock market is not the economy.
The stock market is essentially a forward looking pricing machine that incorporates expectations about the future in stock prices today.
The economy is backward looking, telling us about what has already happened.
Therefore, if anticipated economic news is already incorporated into market prices, we would not expect the stock market to change when news is released as anticipated. It is only unexpected economic events that drive big short term charge in market prices e.g. the Covid 19 pandemic and lock down.
Therefore, it doesn’t matter to the stock market if economic news is good or bad – the key question is was it expected? And the announcement about the recession was already anticipated. As I write, the FTSE 100 index has increased by 1.56% since opening at 08:00 this morning!