What next for the economy?

The economy has always had its ups and downs, but its resemblance to a roller coaster is currently more marked than ever with the recent news of Prime Minister Boris Johnson’s resignation. 

We were finally getting over the financial crisis (and actually starting to worry about recession again) when Covid struck. Then, in the trough of the worse economic downturn in 300 years we discovered that recovery was driving the FTSE to new heights, and the job market into a frenzy. 

In the wake of that, it became clear that the recovery was overheating and that we are facing a period of rising inflation and industrial action. 

Russia’s war in Ukraine has made things worse. It has not only meant human suffering – it has affected the entire global economy, driving up the cost of food and energy. It adds to the hardship for those on low-income and means serious food security risks in the world’s poorest economies.

At Continuum we are asking what comes next – because the answer will affect all of us.

What happened to the recovery?

The world economy was on track for a strong, albeit uneven, recovery from Covid-19.

Here in the UK, the problems might have been made worse by post-Brexit squabbles, but it was starting to look as though economic growth had returned. Individuals, households and businesses were enjoying the benefits of low interest rates and a positive outlook, supported by government policies that appeared at least to be geared to generating growth rather than revenue for the exchequer.

The conflict in Ukraine and the supply-chain disruptions from the shutdowns in China due to the zero-Covid policy are dealing a serious blow to the recovery both globally and in the UK. 

Countries around the world are being hit by higher commodity prices, which add to inflationary pressures and curb real incomes and spending, further dampening the recovery. Global GDP growth is now projected to slow sharply this year, to around 3%, and remain at a similar pace in 2023. This is well below the pace of recovery projected last December.

In the UK, inflation is running at around 10% and there are fears of worse to come. The Bank of England has been forced to raise the historically low interest rates which were helping drive recovery – because they were also stoking inflation.

Inflation is expected to rise further over the remainder of the year, to just over 9% in 2022 Q2 and averaging slightly over 10% at its peak in 2022 Q4. What’s more, stock markets are looking depressed around the world, and bonds are falling as well as the value of shares, making planning and investing for the future difficult. There have been signs that retail spending and consumer confidence are down as the squeeze on real disposable incomes is starting to weigh on the household sector.

But – as with all rollercoasters – any downturn will be followed by a ride back up.

The Bank of England has noted that things may be a little brighter than the tabloid headline writers might make us believe.  Their May monthly report observes that UK GDP is estimated to have risen by 0.9% in 2022 Q1, stronger than expected in the February Monetary Policy Report. The unemployment rate fell to 3.8% in the three months to February and is likely to fall slightly further in coming months, consistent with a continuing tightening in the labour market and with a margin of excess demand at present. Surveys of business activity have generally remained strong.

The level of GDP is expected to be broadly unchanged in Q2, although a technical recession, defined as two or more quarters of economic contraction in the second half of the year appears to be a possibility.

What can you do?

The Bank of England’s experts are certainly not saying that the UK economy is heading back up just yet, which means challenges for anyone who needs to invest to grow their wealth.

Fortunately, challenging though market conditions may be, there are investment strategies that can provide rewarding prospects even in falling markets, which might be worth a close look.

At the very least, it is time to take a fresh look at your existing portfolio to ensure that your holdings are most appropriately placed to maintain the wealth you already have.

At Continuum we have the expertise to help you with your investment plans, helping you develop the strategy and the portfolio that is right for you – and for whatever comes next for the economy. 

To discuss how that expertise can help you, contact us today.

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

The value of your investment can go down as well as up and you may not get back the full amount invested

https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2022/may/monetary-policy-report-may-2022.pdf

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