Is the UK headed for a recession in 2022?

Kate Anderson investigates whether higher interest rates, supply chain issues and surging energy prices could mean there’s a recession on the horizon.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Anxious young man biting his nails fingers

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Until recently, the UK seemed to be back on track. Economic output was on the rebound and, with Covid-19 restrictions lifted, people were out splashing their cash. However, reports of rising energy prices, tax hikes and supply chain issues have dented confidence. So is the UK headed for a recession next year?

[top_pitch]

What’s happening with the economy?

It looked like the UK was on track to make a full economic recovery. House prices were booming and things were opening back up again. Stats from the ONS showed that the economy grew by 0.4% in August. The summer of the staycation meant restaurants, hotels and campsites experienced a much-needed boost.

However, right now, the economy is still 0.8% smaller than it was before the pandemic.

In the past few weeks, it’s been hard to avoid news that inflation could exceed 4% by the end of the year. With that and supply chain issues putting a dent in our Christmas plans, it’s understandable that confidence is low.

The biggest game-changer could be the Bank of England increasing interest rates. The bank has indicated that it needs to move away from the ultra-low rate of 0.1% sooner rather than later in order to tackle inflation. But could this push the UK into a recession?

Are we looking at a recession in 2022?

A recession is when the economy records two consecutive quarters of negative growth. Right now, experts are forecasting growth of 0.9% in the first quarter and 0.7% in the second quarter of 2022. So if this is the case, the UK will avoid a recession.

However, the pressure of inflation and high energy prices means that some economists are predicting there could still be a slight chance. And when I say slight, I mean only a 10% chance.

Whatever happens, the start of 2022 is likely to be a pinch point. With Christmas coming up, issues are expected due to supply chain problems, which may dent consumer confidence and bleed into the start of the year.

Then there is the energy cap coming in April, plus rapidly rising prices and increased taxes. All of this means that we are more likely to tighten our belts than go on an extended post-pandemic spending spree.

Finally, higher interest rates could also finally take the wind out of the housing market’s sails. This could also have a dampening effect on the economy.

[middle_pitch]

Can you recession-proof your finances?

You may not be able to avoid the impact of a recession entirely, but there are ways to strengthen your personal finances.

  • Act early: If you are concerned about the economy taking a turn for the worse, then the earlier you make changes, the stronger your position will be. This includes looking at your budget and finding ways to save money where possible.
  • Get in control of your debt: If you have any outstanding credit card debt or personal loans, then one of your first steps should be to pay off as much as you can. This type of debt is expensive, so reducing your exposure is a good thing for your finances.
  • Build up emergency savings: If you can build an emergency savings fund, then you will be in a better position to handle an unexpected bill or event.
  • Make a switch: Now is the time to look for a better deal, be it for your energy bill, broadband or car insurance. If you can switch to a cheaper deal, then you can reduce your monthly outgoings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »