Rishi Sunak, the Chancellor, said on the 19th of May that the UK is heading for a ‘recession like we’ve never seen’ on the back of several months of the economy being closed in many sectors.
Mr Sunak’s measures to support businesses and their employees since the start of the Covid-19 crisis have undoubtedly saved a lot of hardship across the UK but the scale of the support will weigh heavy on the public purse for years to come. The ability for the Chancellor to continue this type of support seems to hinge on how quickly the economy can be re-opened and in turn, that hinges on infection rates and a potential vaccine.
Talk of shifting to a home-based economy and the death of the office feels premature and reversing many years of mankind’s social instincts is almost impossible. It certainly won’t happen in the time it takes for a vaccine to be found.
Types of recession and recovery shapes explained
Focus has now shifted away from worrying about whether a recession is coming to what a recovery might look like. Here are the terms we will all become familiar with over the coming months:
As you’d expect given the shape, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery.
This is where there is a longer period at the bottom where GDP (growth in the economy) may shrink for several quarters before recovering.
This is what is known as a double-dip recession. The economy falls into recession, recovers with a short period of growth, then falls back into recession before finally recovering.
L-shaped: This is the one we should all be worried about. It’s when an economy has a severe recession and does not see a return to growth for a number of years. This is when a recession can become a depression.
All in the vaccine?
The stock market is now moving to the tune of the scientific community and the activity surrounding a potential vaccine. The chart below shows the impact of Wren Sterling’s client, AstraZeneca, announcing it would make 30 million vaccines, so on May 18 this affected the markets. That’s just one example and we can expect many more, ensuring the markets remain volatile.
What about financial planning in a recession?
As financial planners, we know nothing about vaccines so our focus is on controlling what we can control – our clients’ financial plans. What we’ve seen since this crisis started is that people still have many of the same needs, although new ones will emerge.
There are still investments to be made, retirement plans to create and estate planning to execute. Unsurprisingly, we’ve seen protection enquiries increase and people who might not previously have considered a financial adviser have been calling because they’re concerned about the suitability of their retirement plans and pension fund.
We’re also giving financial advice over the phone, Skype and Microsoft Teams for new and existing clients.
Financial planning and investments in particular are long term endeavours. Whatever shape the recovery takes, history tells us that playing the long game usually pays off. If you invested in the US stock market at any time over the last 100 years, the chance of you making a loss in a 1-year time horizon is 27%, that decreases to 13% over 5 years and 0% over 15 years. (see from 9:00 in our video with Morningstar).
Making big decisions in the middle of a crisis is rarely a good decision but the peace of mind that can be achieved through a plan made with the help of an expert can be just the tonic in an uncertain world.
The value of an investment and income can go down as well as up, and is not guaranteed.
The Financial Conduct Authority does not regulate taxation & trust advice and will writing.