Experts forecast a recession in 2023. Here’s why and what it means for your investments

Experts are predicting that the UK will face a recession in 2023. While it can be tempting to react to this news by changing your investment strategy, sticking to your long-term plan makes sense for most investors. Read on to find out why.

Several factors are contributing to economic uncertainty, including high inflation and concerns about energy supply. The long-term effects of the Covid-19 pandemic and the ongoing war in Ukraine are two of the reasons for these challenges.

In its November report, the Bank of England said the economic outlook was “very challenging”. It expects the economy to be in “recession for a prolonged period”, adding that inflation was forecast to remain high until mid-2023 when it is expected to fall sharply. 

Other predictions also paint a gloomy picture of the UK economy. 

According to the EY ITEM Club, the economy will contract by around 0.2% each quarter from the final quarter of 2022 until the second quarter of 2023. Overall, it expects the economy to contract by 0.3% in 2023. This compares to a previous forecast that indicated the economy would grow by 1%. 

The organisation noted this is shallow when compared to previous recessions thanks, in part, to the government’s intervention on energy bills. 

Hywel Ball, EY UK chair, added: “There are very significant risks to the forecast, with the potential for further surprises or global instability creating additional drags on growth. Businesses will need to think very carefully about their resilience and plan for different scenarios, while also being mindful of the support they provide to their customers and employees.” 

Similarly, Goldman Sachs has downgraded its growth forecast for the UK, according to a Guardian report. The investment bank now expects the UK economy to shrink by 1% in 2023. 

A recession could lead to market volatility, but history indicates it recovers in the long term

While these predictions can be alarming to an investor, remember, that markets have recovered from previous downturns.

Economic uncertainty can lead to businesses and households tightening their belts, which has a knock-on effect on business profitability and markets. While it’s impossible to predict the markets, history shows us that they have recovered from recessions in the past. 

Take the 2008 financial crisis. In the UK, the recession that followed lasted for five consecutive quarters. During this time, the markets fell, but they went on to recover and grow. Investors that panicked and sold amid the downturn would have turned paper losses into real losses and missed out when markets began to rise. 

Over the next year, your investment portfolio may experience volatility or a fall in value. While all investments carry some risk, looking at how markets have responded to similar events over the long term in the past can give you confidence. 

If you’re tempted to make changes to your investments, here are five things you should do.

1. Focus on your long-term goals

As highlighted above, investment markets have historically delivered returns over the long term. Rather than responding to short-term economic challenges, focus on why you’re investing. 

2. Don’t make knee-jerk decisions

It can be easy to make knee-jerk decisions, especially during investment volatility. But the decisions you make can have a long-lasting effect, so it’s important that they are measured. Taking some time to weigh up the pros and cons can highlight where you could be making a mistake by reacting to short-term volatility. 

3. Review investments alongside your financial plan

Don’t think of your investments in isolation, they should play a role in your overall financial plan. So, if you’re tempted to make changes, review your options in the context of your wider finances and goals.

4. Consider your risk profile before you make changes

Before you make any investment decisions, you need to consider how they could change your risk profile. Choosing risk-appropriate investments is important. Taking too little risk could mean you don’t reach your goals, while taking too much could mean you’re exposed to more volatility. 

5. Speak to us

If you have any questions about the current economic situation or would like to discuss your investment plan, speak to one of our team. We’ll help you understand the effect on your lifestyle and your goals. Whether you want reassurance that your plans are still on track or you’re considering making changes to your investments, we’re here to help. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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