- GDP data revealed that the UK economy shrank by 0.5% in December.
- Output was flat for the fourth quarter of 2022, so we’re not in a recession.
- The Bank of England predicts we’re still heading for a recession later this year, but it will be shorter and shallower than had been predicted.
- What this means for the economy and markets.
- Reasons to be cheerful (ish).
- How to protect your finances.
Q4 2022 hedge fund letters, conferences and more
What This Means For The Economy And Markets
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
Although a distinct chill descended in December, as bad weather, strikes and more painful price hikes blew in, the downturn wasn’t deep enough to push Britain into recession. There is still a chance the economy will still suffer two back-to-back quarters of negative growth this year, but the murky stretch of water ahead is set to be shallower and less lengthy than predicted in the Autumn when the country was also wracked with financial instability.
So, instead of doing the timewarp and bracing for a recessionary return to the seventies, sparked by energy shocks, soaring inflation and industrial strife, we could be heading for an early noughties-style period of stagnation.
The dot.com bubble burst in 2000, sparking a US slide into recession in March 2001, with France and Germany following suit. However, the UK narrowly avoided the same fate, with British shoppers providing a spending boost to lift growth.
Back then, in March 2001, US R&B singer Joe was top of the billboard charts with the track Stutter and it looks like the UK might just stutter and stumble through the cost-of-living crisis, as consumers splash out on socialising and sunshine-filled holidays, to compensate for the grey days of winter.
The FTSE 100 has provided cheer, racing up to surpass recent record highs as the energy crisis has eased and brighter spots emerge for the global economy.
There is, of course, still a chance that with the UK housing market set to turn from a quiver to a shiver as painful rate rises start to hit, consumer confidence, which has been inching up, may start to seep away again.
Output across the economy is still 0.5% lower than before the pandemic hit. With interest rates set to rise further, shoppers may baulk at swallowing yet more painful price rises, which could still hit consumer discretionary stocks listed on the FTSE 100, with some companies warning of uncertain months ahead.
However, inflation is inching down here in the UK and in other nations around the world, which have been sideswiped by punishing price spirals. There is also more confidence washing around, helped by the re-opening of China’s vast economy.
This positive sentiment is helping the Footsie keep a spring in its step for now, as it hovers near fresh record highs, and could keep buoying the confidence of British consumers and companies in the months ahead.”
3 Reasons To Be Cheerful (ish)
- The labour market is fairly tight. The unemployment rate has risen very slightly in recent months, but is still just 3.7%, and while the number of vacancies has fallen, it’s still relatively high compared to the number of unemployed people. It means that even if your employer lays you off during this period, you stand a reasonable chance of finding work.
- Higher mortgage rates won’t last forever. For homeowners, higher mortgage rates clearly bring huge challenges, and those with larger mortgages will feel the impact of rate rises magnified even further. However, for the millions on fixed rates that expire after the end of the year, there’s better news, because the base rate is expected to start falling, so the hit from remortgaging is likely to be smaller.
- We’re still sitting on lockdown savings. Although rising prices have damaged our financial resilience, the HL Savings & Resilience Barometer shows that on average we’re still better off than before the pandemic hit. Unfortunately, lumpy distribution of both savings and higher costs mean those on above-average earnings will be better off, and those earning less than average will be worse off.’’
Prepare Your Finances
Sarah Coles, head of personal finance, Hargreaves Lansdown:
‘’Regardless of whether the future holds recession or stagnation, life is going to get tougher for an awful lot of us, so it’s worth taking stock, and preparing for whatever the future holds. There are five sensible steps:
- Revisit your mortgage
If you’re set to remortgage this year, you still have options. You might choose to revert to the standard variable rate while you wait for mortgage rates to fall. The problem here is that rates have risen and are expected to do so again, so if rates take longer than expected to come down, you could spend a fortune in additional interest in the short term.
You could choose to remortgage onto a variable rate deal while you wait for fixed rates to fall. This is a very popular approach, although you need to factor in the fees, and the fact rates will rise whenever the base rate does. Alternatively, now that the best fixed rates have dropped below 4%, you may choose to fix now, especially if it’s really important for you to be able to plan your outgoings.
- Look at your spending
One useful way to protect yourself is to cut your costs and build wiggle room into your budget.
Start by assessing where you stand right now. It can be helpful to draw up a list of what you have coming in and what you spend, so you can see why you have a shortfall. Then focus on where you might be able to cut back.
If you haven’t done things like cutting out non-essentials and shopping around for things like groceries and broadband, then now is the time. If you have already done this, it’s much harder, but try to consider bigger lifestyle changes that could bring your costs down. The aim is to tweak your outgoings, so you spend less than you earn and build a buffer.
- Get borrowing under control
If your circumstances change, short term debts (like credit cards) that you previously considered perfectly manageable may start to weigh far more heavily on you. It’s worth using this opportunity to halt your borrowing and take steps to repay what you can. This is a sensible home for any surplus you build up through careful budgeting.
- Build your emergency savings safety net
As a rough rule of thumb, we should have 3-6 months’ worth of essential spending in a competitive easy access savings account (1-3 years’ worth in retirement). You should also have any money you need over the next five years in savings. If you don’t have this in place already, once you’ve got your short-term debts under control, you can redirect your monthly surplus into savings.
- Have an employment Plan B
This may simply mean doing any preparation you’d need if you were to lose your job. You might want to update your CV and work on your networks – both in the real world and on social media sites like LinkedIn.
Conclusion
There’s always the chance you won’t need to fall back on any of this, and that we’ll escape a recession and survive the storms of stagnation. But it’s far better to build in protection that you don’t end up needing, than need protection you haven’t prepared.
