On the day after Valentine’s Day, data found the UK fell into the recession, but where does this leave savers’ and investors’ relationship with their returns?
The announcement came as gross domestic product (GDP) dropped between October and December 2023, for the second three-monthly period in succession.
It means the nation suffered six months of growth slowing down output across services, production, and construction.
While the recession was described as “shallow” and “probably the most short-lived in history”, as financial services react to the news, there will likely be some impact on your finances.
One source could come from the Bank of England (BoE), which has been called by some experts to cut the base rate of 5.25% ahead of its announcement on 20 March. This means the interest rates on savers’ funds could be hit, leaving savers’ returns diminished.
Savings account rates could drop as banks prepare for base rate
Dean Butler, managing director at Standard Life, said: “Many expected the news that the UK entered recession last year due to the impact of high inflation and rising interest rates on households and retailers, but the ‘r’ word always causes concern.
Butler added: “The most immediate impact on your short-term savings is likely to be retail banks pricing in an expected cut to the base interest rate, as the fact we’re officially in recession will heap pressure on the BoE to start to change their position.”
He believes now could be a good time to cash in on generous offers before a potential price decrease after the Monetary Policy Committee’s (MPC’s) interest rate decision.
“We’ve already started to see interest rates on ‘best buy’ savings accounts fall from around 6% last year to below 5%, and now’s a good time to shop around for the best rate before rates possibly fall further,” Butler said.
Growth on £10,000 at 4% inflation
| Year | 5% Interest | 3% Interest |
| 1 | £10,290 | £9,991 |
| 2 | £10,588 | £9,982 |
(Source: Standard Life)
What about your stock market investments?
The recession announcement may also impact your funds invested into the stock market, but AJ Bell’s Laith Khalaf believes it doesn’t always mean share prices will drop.
The head of investment analysis said: “No one is pencilling a big rebound in the UK economy this year, or next for that matter, but the low levels of growth expected are not exactly new conditions for British businesses and are reflected in low valuations. It’s also important to recognise that many of the companies in the UK stock market derive lots of revenues from overseas, and so aren’t solely reliant on the UK economy.”
Khalaf added: “The reality is that the economic slump is a result of the energy price shock following Russia’s invasion of Ukraine, and the rise in interest rates necessary to tame the subsequent inflationary pressures.
“Time should be a healer as economies gradually adjust to the new reality, and monetary conditions start to loosen again. In the meantime, though, there are concrete steps investors can take to mitigate risks and maximise returns in the face of recessionary conditions.”
The analyst provided five tips on how to ensure you’re making the most of your investments during a period of recession.
Five tips for investing during a recession:
Spread those eggs
Having a balanced and diversified portfolio is always important, but takes on even greater significance when times are tough. Economic hardship puts pressure on businesses all across the market spectrum and you never know precisely where the cracks are going to appear, so you shouldn’t have too much in any one stock, fund, industry, or region.
Be vigilant but not a vigilante
You should regularly review your portfolio, but don’t let this lead to over-trading. When markets are volatile and losses are mounting, you might be drawn into doing something just to try and exert some sort of control. It’s incredibly tempting to be a portfolio vigilante and take matters into your own hands, distributing some natural justice by petulantly dispensing with investments that have fallen in value.
Be more Buffett than Batman. By constantly tinkering, you’re likely to end up making mistakes and racking up trading costs too.
Boost returns by saving tax
When growth is thin on the ground, you should also ensure that you bank the easy wins. That means making sure your portfolio is invested as tax efficiently as possible using SIPPs and ISAs, and ensuring that you’re keeping charges under wraps too. The annual benefits that are yielded by these simple steps might seem small, but they will compound your returns year in and year out, and lead to a bigger nest egg when you come to draw on it.
Don’t ignore dividends
Poor economic conditions aren’t great for profits and hence dividends, but many UK companies have international income streams and are still making profits from UK operations despite weak economic growth.
The FTSE 100 is forecast to yield 4.2% this year, according to the latest AJ Bell Dividend Dashboard, and dividend cover sits at over two times earnings. That means company profits are more than double the number of dividends being distributed, giving companies a large buffer before they need to start thinking about cutting back again. Investors can also find some solace in investment trusts, which can hold back dividends in good years to pay out in tougher times, with some having paid a rising income to shareholders for decades.
Drip-feed your money into the market
The market is always looking ahead, and though it might sound jarring, now is probably a good time for investors to be considering when there might be some improvement in economic climes, rather than fretting about the current malaise. That doesn’t mean betting the whole farm on a swashbuckling recovery, but it might be a good time to start thinking about drip-feeding money into the market.
A regular investment plan will smooth the ups and downs of the stock market, because if share prices fall, you buy in at a lower level. Recessions are part and parcel of the normal economic cycle, and if you’re investing for the long term, you have to expect to encounter them. While this can be painful for your portfolio, the upswing in share prices when recovery comes knocking can be swift and powerful, and if you’re not invested when this happens, you could be taking the rough without the smooth.
