In Q3 last year, the Bank of England (BoE) suggested that the UK could be on the precipice of an extended recession that may be the longest of its type among the G7 nations.
What’s more, it was thought that a recession of this type could last for five consecutive quarters until the end of 2023 at least, as inflationary pressures and the cost-of-living continued to grow at an exponential rate to earnings.
However, it was recently revealed that the UK economy enjoyed nominal growth in Q4 of 2022, helping the region to avoid the threat of a technical recession for now.
But what was behind this uptick in economic fortunes, and can the UK continue to avoid a recession through 2023?
Why Did the UK Economy Grow in Q4?
It was widely expected that the UK would tip into a recession at the end of Q4 2022, but October brought unexpected growth of 0.5% as the economy showcased the formative signs of recovery.
This was followed by further, nominal growth of 0.1% in November, with this primarily fuelled by a drop in inflation (from 11.1% to 10.7%) and the increased expenditure on food and drink by football fans during the FIFA World Cup in Qatar.
As a result, a contraction of 0.4% would be required in December to see the economy shrink overall during the fourth quarter. Fortunately, the early estimates suggest that this won’t be the case, meaning that the UK should escape entering into a technical recession for now.
How is the UK Economy Shaping Up in January 2023?
Further good news has emerged from the latest December figures, with inflation having fallen for the second consecutive month (although this was an incremental depreciation from 10.7% to 10.5%).
This has come against the backdrop of falling wholesale energy costs in the UK and Europe, while the bank has suggested that this trend could drive a significant drop in inflation during the first half of 2023 for as long as it’s sustained.
This also appears to support the slight economic improvement at the end of 2022, and the early indicators are that the UK could benefit from increased consumer spending and improved growth during Q1 at least.
Most crucially, this could help see the UK avoid a technical recession for the first three months of 2023. This, in turn, will shorten the period of time that the UK eventually spends in recession, or potentially prevent this eventually from occurring at all if inflation falls at a fast enough rate.
What’s the Outlook for Investors?
Of course, inflationary recessions are relatively rare, with the cost of goods and services typically declining as economies contract.
High inflation can significantly worsen the impact of a recession, however, as businesses are hit with rising operational costs that further impede their ability to trade and generate any kind of viable profit margin.
Consumer spending is also squeezed further during an inflationary recession, making it much harder for governments to plot a way out and stimulate growth.
The question that remains, of course, is what does all of this mean for investors? Well, even if the UK is able to avoid a technical recession, economies around the world will either contract overall during 2023 or record nominal GDP growth that’s far below what economists would expect.
So, although much depends on your outlook and appetite for risk, the good news is that there’s a multitude of options to help you steer a course through any economic contraction and achieve your investment objectives. For example:
#1. If You’re Risk Hungry, Consider Forex and Cryptocurrencies
If you have a strong appetite for risk and want to increase your returns as the economy contracts, consider increasing your investment in forex and cryptocurrencies this year.
In the case of forex, this is a speculative market that enables you leverage volatility and individual currency price movements to achieve short-term profits.
Make no mistake; forex prices fluctuate wildly on a daily and even hourly basis, and you can trade these movements to claim incremental but frequent gains within a relatively short period of time.
You can even use forex arbitrage software to trade broker pricing errors and temporary FX market inefficiencies. This is a high-risk option as such errors are usually corrected in minutes, but it can yield lucrative returns in a similarly short period of time when done efficiently.
As for crypto assets such as Bitcoin (BTC), they continue to enjoy a short-term inverse relationship with inflation.
Given that inflation is projected to fall steadily in the UK and similarly developed nations through 2023, the value of crypto should increase overall and offer a viable near-term return for investors.
#2. If You Want to Consolidate – Consider Certain Stocks and Bonds
If you simply want to consolidate during the current economic climate and retain the core basis of your investment portfolio, you should consider allocating the majority of your funds to stocks and bonds in 2023.
However, the stock market remains quite volatile at present, so it’s crucial that you select the right equities and shares if you’re to achieve your goals.
Some stocks certainly perform better than others when economies contract, with healthcare shares offering a relevant case in point. In fact, healthcare and consumer staples (such as Walmart and Nestle) are universally popular stock options, as they tend to produce and sell goods that benefit from constant demand.
They also tend to be large-cap stocks, which also outperform small and medium-cap alternatives during times of economic contraction.
As for bonds, you should prioritise US Treasury, Federal and government-issued bonds through 2023. The reason for this is simple; as they’re considered to be largely risk free as the issuer is unlikely to go solvent or endure bankruptcy.
The key here is to identify options that can deliver stable (if relatively modest) returns, as you look to consolidate your capital ahead of any future economic upturn and change in investment strategy.
#3. If You’re Risk Averse – Seek Out Safe Havens
Obviously, economic contraction and recession can send risk-averse investors running for the hills, but there remain a number of assets that can be leveraged to minimise loss and market exposure in 2023.
Arguably, dividend stocks (such as Coca-Cola) and Treasury bonds may also be categorised as risk averse investment options, as they typically minimise your loss and exposure to risk while still delivering relatively frequent and reliable returns.
Short-term Certificates of Deposit (CDs) also offer value to risk averse investors, as they tend to have a maturity that’s less than one year and aren’t vulnerable to medium or long-term economic trends. Your returns are also guaranteed and easily calculable, although you should note that a high rate of inflation can outpace your gains and minimise the final payout.
At the extreme end of this scale, you could also move your money into a high-yield savings account.
This option is completely risk-free, while you can usually access interest rates of between 3% and 6% through this type of account. So, if you want to eliminate risk completely and wish to accrue wealth incrementally, this may be your ideal option in 2023.
This is particularly ideal if you have a large amount of investment capital, as this will increase your returns dramatically over the course of the year.
