At the start of May, the Bank of England raised interest rates to 1% – the highest level since since February 2009. At that time, the hike in interest rates came during a recession: one that was caused by the 2008 financial crisis.
Many are fearful that this rate increase is a sign that another recession is looming. But is this the case – and, if so, what does it mean for investors?
A gloomy outlook
The Bank of England’s May update included other predictions that suggest that a recession could be on its way.
They stated that unemployment is set to rise to 5.5% by 2025 – equating to an additional 450,000 people out of work. They estimate a 1.75% decline in real disposable household income in 2022 – the second biggest decline since 1964.
What’s more, while pay growth is set to be higher than expected this year, the Bank of England expects it to fall over the following two years.
“A real chance” of recession
Since the Bank of England’s update in early May, the situation has worsened further. They predicted that inflation would reach 10% later this year – the highest since 1982.
Already, inflation stands at 9% – with suggestions that this figure stands at 10.9% for many poorer families.
The British Chamber of Commerce warns that “the scale at which inflation is damaging key drivers of UK output, including consumer spending and business investment, is unprecedented and means there is a real chance the UK will be in recession by the third quarter of the year.”
What would this mean for investors?
During a recession, many investors will likely see the value of their stocks plummet – as well as plenty of volatility which can cause significant price swings. As a result, some investors may end up pulling their money out of the market completely, panicked by the movements they’re seeing.
For some, it’s an opportunity to embrace value investing. For others, short selling is the solution, albeit a very risky one. Some, on the other hand, simply ride out the recession, believing that holding assets for the long term will see them bounce back.
It’s a decision that each individual investor needs to make based on their own personal situation, their attitude to risk and their investment behaviour.
What would you do if a recession hit?
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