The economic news is rarely as bleak as it was on Thursday, 4 August.
Raising interest rates by 0.5 percentage points to 1.75% — the biggest increase in 27 years — the Bank of England predicted that inflation would reach 13% by the end of the year, and that by the fourth quarter of this year, the UK would be in a recession that would last all through 2023 and into 2024.
Soaring fuel bills, soaring food bills, depressed real incomes made worse by rising taxes — Britons face the sharpest squeeze in living standards in 60 years, concluded the Bank.
Wrong again?
Now, the Bank’s record in these things is pretty dire.
Those of you with long memories of its dismal track record might be forgiven for immediately concluding that the UK is headed for an unparalleled boom in living standards, soaring GDP, an era of low interest rates, and plummeting inflation.
But sadly, simply assuming that the Bank has got it wrong — again — won’t on this occasion work. The UK’s economic prospects really are fairly bleak, and about to get worse.
There’s more than a whiff of the 1970s in the air: ‘stagflation’, with all its wealth-sapping consequences.
Consumers are set to suffer
How bad a recession will it be? Two other recessions come to mind: 2008-2009, and the short, sharp slump of 2020.
According to the Bank, 2022-2023 won’t be like either of those. The Bank has produced an interesting chart, comparing a number of recessions, and both in terms of depth (peak-to-trough) and duration, it is expecting 2022-2023 to most closely resemble the recession of the early 1990s.
Good news of a sort, you might think: in GDP terms, that recession was far less severe than 2008-2009, and also far less severe than 2022.
Maybe so, but it felt bad. And economist and writer Duncan Weldon, writing in the Financial Times, observes that 2022-2023 will feel the same.
“The hit to household incomes will run far deeper [than 2008-2009 and 2020]. The forecasts show the largest two-year fall in real household disposable income on record,” he noted.
So if your portfolio relies heavily on discretionary consumer expenditure, it could be time to re-think things.
Three thoughts
With all that said, three things appear to be worth pointing out.
The first is that we don’t yet know — despite a lot of public posturing — exactly which economic policies our new incoming prime minister will pursue.
The Bank has had to assume a broad continuation of present policy, and that obviously won’t be the case. So actual economic outcomes could vary a lot.
The second observation is that you don’t fight a recession by raising interest rates and increasing taxes — yet that is exactly what the government and the Bank are doing.
So again, the Bank’s projections could differ from the actual outcomes, should battling recession take precedence over battling inflation.
And the third — and for investors, most interesting — observation is that projections for the UK are much bleaker than for the rest of the G7 economies, as a telling chart in the Financial Times makes clear.
The United States, Canada, Japan, German, France, Italy: all these countries will see high inflation in 2022, and again in 2023. But all look set to experience positive economic growth in 2023.
Only one G7 economy — the UK — will see an economic contraction. As well as levels of inflation far greater than the other G7 economies.
Go global for growth
For investors, then, the message is clear. As I’ve said before, diversifying out of the UK makes good sense, for at least a proportion of your portfolio.
Now, it makes even more good sense.
Low-cost ETFs? Sure. And don’t forget the investment trust sector either: Scottish American, Witan, Mid Wynd International, Murray International, Brunner — all these (and several others besides) provide global exposure to varying extents.
