With the combination of soaring inflation, high-interest rates and a European war impacting energy prices, the odds are seemingly stacked in favour of a recession in the UK.
As difficult times lie ahead for households across the country, how can you help your clients limit the impact?
The Bank of England recently warned of an economic growth contraction towards the end of 2022, with the same concerns seeping into 2023.
The reasoning behind this doesn’t just sit with one factor, but instead a unique combination of circumstances.
The UK, still recovering from the damage of the coronavirus pandemic, is experiencing a scarcity of workers while demand increases, pushing up the price of goods.
With inflation now spiralling to heights not seen since the 90s, the government is raising interest rates as a combative measure.
This is all paired with huge increases in energy prices, which were already rising before the Russia-Ukraine conflict, with government-imposed sanctions on Russian oil and gas further contributing to the price hikes.
Households are already feeling the impact of the cost of living crisis, and while higher interest rates may serve to tackle inflation, it risks stalling the economy. Should unemployment begin to rise, it could be enough to catalyse a full-blown recession.
The Bank’s concern doesn’t quite predict a technical recession but instead forecasts “very weak” quarterly growth for 2023, and ultimately a contraction for the year.
Some economists are advising households to prepare for the worst, with the double blow of slowing growth and rising living costs likely to weigh too heavily on GDP to avoid a recession.
Retail sales rose in April, following a dip in March, but rather than indicating a positive response to the cost of living crisis, it suggests that households are foregoing pubs and restaurants in favour of eating and drinking in.
The Bank of England’s chief economist, Huw Pill, has admitted that inflation is the central bank’s biggest challenge in 25 years, with its most recent forecast predicting inflation will rise above 10 per cent by the end of 2023.
While experts are not yet predicting an outright technical recession, all the signs point toward the compounding economic issues taking a severe toll on the country’s GDP.
It is worth considering your position, as well as your clients; in the face of a contracting economy, precautions may be vital to the survival of businesses across the UK.
Recessions impact businesses large and small, so it’s important for you to get your own house in order before offering support to clients.
If you are offering financial advice, you may well see your access to consumers reduce as UK households tighten their belts.
With less work comes less company revenue, and you may have to take certain measures, like benefit reductions or a reduction in personal income, to keep your business above water.
However, your role as a financial adviser may be more important to some of your clients than ever.
Those who have substantial assets will want to be guided to safety, and with more people looking to maintain financial stability, you may end up being busier than ever.
Plus, after a recession usually comes an economic recovery, and in this period financial advice will be pivotal.
Many of your clients will likely be concerned by the impending threat of a recession.
Depending on their circumstances, the hike in interest rates and challenges brought by the cost of living may place a significant financial burden upon them.
They will require sound advice on how best to protect themselves against the most damaging effects of a UK recession.
In 2020, the Office for National Statistics (ONS) declared the steepest recession on record after GDP fell by 19.6 per cent between April and June, after a 2.2 per cent contraction in the previous quarter. But this was a unique recession; the pandemic spawned volatility, and the third quarter of 2020 saw growth of 17.6 per cent.
Across advanced economies over the past 150 years, the average length of a recession was one and a half years, with an average GDP fall of 2.5 per cent per year.
Examining the US recessions of 1980, 1990, and 2000, researchers found that while 17 per cent of the 4,700 public companies they studied fared particularly badly, 9 per cent of the companies flourished and outperformed their competitors by at least 10 per cent in sales and profits growth.
Time and again, the research showed one factor to be the key to success: preparation.
For example, few of the companies that stagnated in the aftermath of the Great Recession ‘made contingency plans or thought-through alternative scenarios’, and instead turned to survival mode out of necessity.
In the face of adversity, it can be helpful to get ahead and be proactive, rather than reactive, to economic issues – and this advice may prove pivotal for your clients as a recession looms.
Whether your client wants to protect their finances or the interests of their business and investments, it’s important that you have the right answers.
When looking at their personal planning, your clients may think about the following:
Cut-backs – Pinpoint where they can afford to reduce spending, avoiding necessities like food, cars, and household repairs, and instead focusing on luxuries like holidays, gym memberships, and eating out.
Paying off high-interest debt – If a recession is on the horizon, an important move for your clients may be to get rid of any debt that could weigh them down. As a short-term benefit, it will create room in their budget for things like growing an emergency fund, while avoiding the long-term implications of potential borrowing benchmark hikes from the Bank of England.
Build an emergency fund – This should be of vital importance whether there’s a recession or not, but it speaks to proactivity – taking steps in case the worst should happen will soften any financial blow.
Meanwhile, when considering their own business, some alternative advice for your clients may include:
Cut costs, but not quality – Cutting costs doesn’t have to come at the expense of your client’s product, and they could be in jeopardy if they sacrifice quality to keep the business afloat. Instead, they should look to lowering overhead costs like location, or reduce spending on things like administrative fees, while focusing on core competencies – even scaling back the number of products if resources are spread too thinly.
Don’t cut out your marketing – There are plenty of ways for your clients to continue marketing their products without breaking the bank – particularly in the digital space, with tools like social media and newsletters proving efficient and cost-effective. Keeping a steady stream of customers coming through the door with marketing tools is a good way of maintaining cash flow. Think about your current customers and what you can offer them; loyalty during a recession is key, so finding ways to keep them coming back is likely to pay dividends for your clients.
Keep debt to a minimum – While debt can be a tool for growth, preparing for a recession will mean keeping things steady rather than seeking expansion. If your clients can maintain operational efficiency and stay out of the red, they will have the best chance of weathering the storm.
In tough times, more people will be seeking expert financial advice.
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