The worst British recession ever?

21 August 2020

3 minute read

The contraction in the UK economy has been significant. However, the numbers alone leave much of the story untold. When thinking about the effects on businesses, consumers and investors we need to take many other factors into account.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest.

What you’ll learn:

  • Why recessions are sometimes a necessary albeit painful adjustment to a part of the economy
  • What we should expect in the third quarter
  • What the future holds for investors.

The contraction described by incoming statistics in the UK and wider world these last few weeks has few, if any, peers. The bald statistics are certainly staggering. We have to go back to the Great Depression to find anything in the UK’s statistical memory that would compare. Even then, the 12% bite taken out of the UK’s third quarter output of 1921 is less than half of the chunk taken out of the second quarter of this year by the coronavirus crisis. However, the numbers alone leave much of the story untold. When thinking about the effects on businesses, consumers and investors we need to take many other factors into account.

Remember, most recessions can be seen as a sort of corrective force. A painful but necessary adjustment to a part of the economy that had become out of shape. Often this can inform the pace of recovery from the contraction. For instance, the last crisis in 2008 left a huge stock of mostly unwanted homes in the US for the economy to work through and a financial system which had to be substantially reorganised, among many other things. These factors dragged on the global economy’s ability to rapidly recover. 

Why this time could be different

This is not the case this time – most of the world’s major economic actors were actually in notably decent health as the crisis struck. In one sense, there was no urgent need for a recession. However, the pandemic forced the world’s governments into putting large portions of the global economy into a kind of suspended animation in order to contain the spread of the virus. This has largely resulted in the recession we see today, but is also informing a much brisker than normal recovery from those lows.

Just as the second quarter registered record breaking declines in output for many of the world’s major economies, the third quarter will likely see some of the fastest ever quarterly rises. Freed from the need to preserve some form of moral hazard and armed with a freshly inked playbook from the great financial crisis (and indeed many other recessions and depressions of the past), policy makers around the world have responded with impressive and unprecedented vigour. Once we get to the other side of this crisis, a true assessment of the damage will focus on the cumulative bite taken out of output rather than just the shocking descent. Our hunch is that the factors outlined above will likely relegate this recession well down the list of economic cataclysms of history when that more complete context is available. None of this is to argue that there aren’t challenges ahead of course, there are plenty.

What does it mean for investors?

For would-be investors trying to translate these gigantic moves in global output into what they’re seeing in the world’s stock and bond markets, the major problem is the anticipatory nature of capital markets – an issue that’s always existed. The downturn that the mainstream economic data is now telling us about is ancient history for capital markets.

The world’s stock markets bottomed back at the end of March, looking beyond the slump to a rebound that was yet to start. Developed world shares, with significant regional variation dependent on sector composition, are now above where they started the year as a result.

The reality for would be investors is that these financial market spasms are an unavoidable part of investing. If we could reliably predict recessions, they would not exist – it would not just be investors hopping out of the way, but businesses, governments and consumers too. However, if these recessions and downturns are part of the tax for investing, the longer term rewards have proved well worth it for those who have persevered. These rewards do not accrue to those who can see the future better than others, it is a simple function of diversifying efficiently to gather up the proceeds of humankind’s ongoing ingenuity and restlessness.

We don’t know who will have the next great idea, or which country that person or group of people will come from. However, a close study of history tells us that we’d be unwise to bet against our species having any more good ideas on how to do more with less. From the humble shipping container, through to the excel spreadsheet and the current advances in AI and robotics, the rewards accrue to those who would take the risk of owning the world’s companies and lending to them. This driving force of financial markets returns has historically far outweighed the infrequent, albeit hair-raising dips, by many orders of magnitude for those able to stick with it for years rather than months.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

All investments can fall in value as well rise; you may get back less than you invest.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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