I’d like to provide you with our perspectives on the financial news we’ve seen over the past week or so, including recession, inflation and what it all means.

The UK in recession

First, let’s cover the big headline, that the UK fell into a recession late last year, joining other countries including Japan and Germany. This isn’t surprising given the cost-of-living crisis we’ve experienced. However, perspective is important and we caveat the headlines with a few additional points:

  • Firstly, let’s cover what a recession actually is: The UK defines a recession as two quarters of consecutive declines in gross domestic product (GDP), in other words produced fewer goods and services. GDP is one way to measure the health of an economy.
  • It’s important to note that gross domestic product and share markets are not the same thing.
  • Companies in the UK are very international in nature, with the largest 100 companies generating over two-thirds of their revenue overseas. This means that UK companies are less impacted by the health of the domestic economy.
  • The recession was judged by UK standards[i], and not all countries adopt the same standards. On a like-for-like basis, the US also encountered a technical recession in mid-2022 (by UK standards) and has since experienced outstanding stock returns.
  • Said another way, the UK wouldn’t yet be in “recession” by US standards – and even if it did – UK stocks could rise sharply like the US did.
  • The view from most economists (take it with a grain of salt) is there are little signs this recession will be severe or lengthy.
  • The key message: be careful judging based solely on the word “recession”.

Inflation

At the same time, UK inflation (which measures the general cost of goods and services) has fallen faster than expected.

  • Inflation actually fell -0.6% for the month of January with food prices finally declining. This is a positive.
  • Overall, we still have high inflation, as it remains at 4.0% year-on-year but the reality is that we’ve had 0.0% inflation from July 2023 to the end of January 2024.
  • This means we’re in a good place relative to other countries in the last 7 months and there is a strong likelihood that the inflation rate will fall further in the coming 3-4 months.

As a result, the Bank of England is expected to cut interest rates sooner than expected. As we know, the Bank of England has had to raise interest rates 14 times, up to 5.25%, to tame inflation, which has really hurt the economy. Most economists currently expect the Bank of England to cut at least 3 times this year—which would be a welcome relief for many.

We also have the elections coming up in the next 3-9 months – both in the UK and US – along with 70 elections around the world in 2024. This will add to the speculation and will be important in the wider context of the world. That said, history shows little by way of elections impacting markets. Yes, we may hit periods of volatility in the lead up, but election years usually deliver positive returns, regardless of whether a labour or conservative government gets in.

Investment case

As long-term investors, we remain optimistic. It might sound strange saying we feel optimistic when a recession was just announced, but that’s how investment markets work. Just look at the US, going from a near-recession in 2022 to 25%+ returns in 2023. Let’s not forget that some of the best returns in history come from holding in the depths of a recession.

Of course, markets don’t move in straight lines. That’s a feature, not a bug. It was famously said that volatility is the price you pay for good returns. We agree with this sentiment.

[i] The UK defines a recession as two quarters of consecutive declines in gross domestic product (GDP). The US prefers to use a more comprehensive but subjective approach, decided by the NBER, taking into account various inputs and often announced years after the event.