Steps to calm nerves ahead of a looming recession

interactive investor experts consider the Bank of England's recession comments.

It’s been a difficult news cycle for UK consumers today, as the Bank of England raises interest rates by 0.75% to help bring inflation under control. This is the biggest increase in 30 years, and the highest since 2008.

And with a recession looking increasingly likely, experts from interactive investor, the UK’s second-largest direct to consumer investment platform, outlines what this means for savings and investments, and how investors can weather the storm.

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Lee Wild, Head of Equity Strategy, interactive investor, explains some key considerations for investors: “The Bank of England’s latest rhetoric is worrying. Inflation must be tamed, but interest rate hikes take time to feed through to the real economy, and there is a risk of making things worse than they need to be.

“Any business that relies on a strong consumer is at risk when household finances get squeezed. The retail industry is already competing with housebuilders for the title of worst-performing sector in 2022, and a lot of bad news is already priced in. However, if conditions do deteriorate further, there could be more pain to come. We’ve already seen profit warnings from ASOS (LSE:ASC), Boohoo (LSE:BOO), and others, and investors would do well to monitor the health of these ‘at risk’ sectors as higher borrowing costs begin to bite.”

Alice Guy, Personal Finance Editor, interactive investor, says although recessionary risk is worrying, it is important not to panic: “Recession can be a result of interest rate rises, because raising interest rates reduces economic growth. However, the rates rise have been needed to control runaway inflation, so the Bank of England is caught between a rock and a hard place.

“With a long recession looking increasingly likely, it’s understandably a scary time for investors and consumers. However - it’s important for people not to panic, as it’s normal for the economy to go through periods of growth and recession. The recession is predicted to be long but fairly mild.

“It’s also important to remember that unemployment is at its lowest rate for 50 years. Although unemployment could rise, it’s still expected to be lower than the figures for 2010, and it’s predicted to be nowhere near as high as the 1970s and early 1980s.”

Key takeaways from a personal finance and investment perspective

Myron Jobson, Senior Personal Finance Analyst, interactive investor, explains: “The Bank of England’s chilling warning that the UK is facing its longest recession since the Great Depression a century ago lays bare the importance of taking steps today to bolster financial resilience now to give you some peace of mind in the coming months.

“Many households will want to try taking steps to shore up their finances. It’s worth keeping a spreadsheet of your own spending habits so you can get a better idea of what eats most into your budget, and where you could cut back.

“Historically, it’s often said that three months’ salary is a fair rule of thumb for an emergency cash safety net. That will be a tough challenge for many of us at the best of times – let alone the raging cost-of-living crisis. But many people will want to double that if they can afford it.

“Other considerations include paying down any debt you may have, starting with the costliest ones and variable rate loans, as well as building a cash buffer for emergency spending.”

Recession-proofing: a reminder of the importance of diversification and drip-feeding

Jobson adds: “When it comes to investments, one of the best ways to recession-proof your portfolio is to have a balanced, global portfolio Some people may be waiting for a better time to invest in the market, but the truth is, without a crystal ball no one knows when that might be and there is a good chance that you would be unaware when that time comes. 

“An alternative for lower-risk investors, or those without lump sums to spare, is drip-feeding your investments on a monthly basis. This helps to mitigate investment risk and smooth out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low. It is a process known as pound-cost averaging.”