What is a recession?
A recession is defined as a fall in a nation’s gross domestic product (GDP) for two consecutive quarters. GDP figures are released four times throughout the year – quarter one (Q1) at the end of March, Q2 at the end of June, Q3 at the end of September and Q4 at the end of December.
If GDP is falling, it’s an indicator that the economy is contracting – which means that growth is slowing, industry is producing less and unemployment might even be about to rise. Recessions are a normal stage in the business cycle, and are usually followed by periods of economic expansion and growth.
Steps to help protect your personal finances during a recession
Commentary from Brian Byrnes, Head of Personal Finance at Moneybox
A recession can be scary. It generates headlines and has real-world impacts – unemployment tends to rise during recessions for example, so a health check on your finances is a sensible step to take right now.
The first thing is to prioritise having 3 months’ worth of expenditure in an emergency fund. This should be separated from your other finances, easily accessible in an emergency, and should give you additional peace of mind.
When it comes to investing, as noted below, different sectors do well in a recessionary environment. But, it can be very difficult to predict this in advance, and even more difficult to get your timing right.
The good news is that in order to hit your financial goals you don’t have to worry about picking sectors or timing your investments. Consistent contributions to a well-diversified portfolio has been shown to be an extremely resilient investment strategy, and if markets do dip during a recession, you’ll be getting more for your money.
How can a recession affect investment returns?
Recessions will affect some investments more severely than others. For a detailed, sector-by-sector breakdown, we’ve included the tables below to showcase and explain which investments tend to be weak or strong during a recession – and which tend to be weak or strong immediately following a recession.
Sectors that do well during a recession
The sectors that do well in a recession are the ones that are more defensive – meaning they stand up better in times of economic uncertainty. 🛡️ Usually, this means the sectors that play an important role in society like consumer staples, healthcare and utilities will do well during a recession or at least, they won’t fall as much as other sectors might. That’s because people will always need food, healthcare and water, even if times are tough. 🍲 💉 🌊
Here’s a rough guide to the sectors that are strong or weak during a recession.
Sectors that do well after a recession
The sectors that will usually perform poorly during a recession are the ones that stand to gain the most once the economy starts to recover and expansion takes over. 📈 Consumer goods, financials, industrials, technology and real estate are all examples of sectors that tend to do well after a recession as spending begins to rise and people have more spare cash.
Here’s a rough guide to the sectors that are strong or weak after a recession. And remember, past performance isn’t a guarantee of future trends.
Aside from these sectors, some investors will also turn to gold during a recession due to its ability to act as a store of value during times of economic hardship.
How to invest during a recession
Our fund range covers a number of the sectors that we’ve included above that are strong during a recession – including a gold ETC and a range of sector-specific ETFs.
If you want to invest in ETFs or ETCs with Moneybox, you’ll need to open a Stocks & Shares ISA. Not only will you get exclusive access to these assets, but any of your investment gains will be free from tax.
You can invest up to £20,000 each tax year with a Stocks & Shares ISA – this is also your full annual ISA allowance. So if you already have a Lifetime ISA with £4,000 in it, you can still invest up to £16,000 into a Stocks & Shares ISA in the same tax year.
We’ve got a lot more investing blogs that will help you become a savvy investor. From inflation and the cost of living, to outlining the things to do before you invest – we’ve got you covered. Head to the Moneybox blog to explore and learn today!
All investing should be long term (min. 5 years). The value of your investments can go up and down, and you may get back less than you invest. Tax treatment depends on individual circumstances and is subject to change.