As the rate of UK unemployment rose to 3.6% in the three months to September 2022 (from 3.5% during the previous quarter), the region inched ever closer to what would be a harmful and potentially long period of recession.
At a recent meeting of the Bank of England (BoE) in August, it was also predicted that the UK would face its longest recession since the global financial crisis, with this likely to last for five quarters through the end of 2023.
But what exactly do we mean by the term ‘recession’, and how should you look to invest your cash during such a period?
What is a Recession?
While the word recession is used broadly and colloquially to describe a period of stagnant economic growth, it’s actually defined as a scenario which a country’s GDP (gross domestic product) falls over the course of two consecutive quarters.
GDP relates to the total value of all goods and service produced in a country such as the UK, and this is known to fluctuate in line with wider and connected macroeconomic inflation (such as inflation and interest rates).
To provide some context, the UK economy shrunk by 0.3% in August, while the BoE’s aforementioned forecast suggests that the economy will contract further in the final months of 2022 at least. This would push the UK into a technical recession, and one that could be sustained indefinitely and replicated across the globe.
Often, the terms ‘recession’ and ‘inflation’ are often misunderstood and used interchangeably too, but these concepts are completely different. For example, inflation describes a rise in the cost of crucial goods and services, and this occurs independently of a recession and even during periods of growth.
Both the BoE and the Federal Reserve actually set an inflation target of 2%, as this can help to optimise spending and aggregate demand during periods of growth. However, when inflation spirals beyond this point and the cost of living starts to outstrip earnings, negative growth and a period of recession can occur.
So, while the impending recession in the UK may be inflationary in nature, there’s a significant difference in the technical definitions of recession and inflation.
How to Invest During a Recession
If you are going to invest during a recession, there are some assets that offer considerably more value than others.
Even though recessions can differ in nature, for example, it stands to reason that safe haven assets like gold are highly prized during any economic downturn.
After all, the value of gold is known in line with demand during national or global recessions, making this a viable asset class that can appreciate as the economy continues to struggle.
However, cash is also king during a recession, as this also provides a secure store of wealth that can retain its value. So, we’d recommend keeping a small, fixed amount of your portfolio in cash or highly liquid securities, including money market funds and the highly speculative forex market.
Broadly speaking, you should also avoid arbitrarily selling investments to raise cash in anticipation of a recession. This represents a significant risk, and one that may trap you in cash holdings as markets rise.
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