Why we are not looking at a depression


The return of lockdown across the UK came as an unpleasant reminder that Covid is still with us, and that despite the fact that a vaccine may now exist, economic as well as the medical symptoms may be with us for some time yet.

But what will the effects be on the economy, and are the forecasts of economic gloom something that you need to worry about?

At Continuum, we are looking at whether a depression is on the way.

Recession vs depression

It is no secret that Covid triggered a recession in the UK, and in most other developed economies.

A recession is defined as a period when gross domestic product or GDP contracts for at least two consecutive quarters. In a typical recession, GDP growth slows for several quarters before turning negative.

Income, employment, manufacturing, and retail sales all suffer, and because they are reported monthly, they can signpost recession long before GDP turns negative.

A depression is very much worse. It has years, rather than quarters, of economic contraction. The Great Depression of the 1930s lasted around six years in the US, although despite the impact on global trade, effects were generally milder and shorter in the UK.

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We have had a recession as a result of Covid – and a severe one at that.  In the UK GDP fell 20.4% – the worst of any G7 nation in the three months to June. Doomsayers were announcing that depression would inevitably follow such a dramatic drop, with high unemployment, bankruptcies and misery all round.

But we are not in recession any more

However, depressions are only likely when there is something structurally wrong with an economy – as in the 1930s, when the bursting of an unsustainable bubble  in the US triggered a global trade meltdown, made worse by economic mismanagement by banks and governments around the world.

The economy of the modern world is better run, and the UK is in better shape than it was 90 years ago. The proof of this is the fact that the UK’s economy bounced back from recession with record growth of 15.5% in July to September.

Far from plunging into a prolonged slump, the economy is no longer even in recession. However the recovery has not yet been enough to fully reverse the damage caused by the pandemic. The Office for National Statistics (ONS) suggests that the country’s economy is 8.2% smaller than before the virus struck.

Where are we now?

The economy is still smaller than it should be, and that is unpleasant for everyone.  The UK unemployment rate continues to rise, leaving many people anxious about the future – especially in light of a new lockdown.

Analysts have warned that the economy will shrink again in the final months of the year because of the impact of renewed lockdowns in different parts of the country.

But although the lockdown is back, there seems to be plenty of reasons for optimism.

This lockdown is nothing like as extensive or as economically dangerous as the first. Schools are back and many businesses have discovered new ways to keep working,

Both the Bank of England and the Treasury have boosted the economy, with loans to businesses, VAT holidays and other concessions helping support both employers and families.

What’s more, it looks as though the vaccine is nearly ready to provide economic stimulus to the whole world.

What should you do?

Far from preparing for economic disaster, it may be time to start thinking about preparing for the recovery. A look with an expert at your investment portfolio – if you have one – and your overall financial planning may be sound tactics.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Protection products or investment strategy, you should seek independent financial advice before embarking on any course of action.

 

https://www.theguardian.com/business/2020/aug/12/uk-economy-covid-19-plunges-into-deepest-slump-in-history

 

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