We’re back in recession….so what now?

Article posted on 23 May 2012

The most recent numbers, issued in late April by the Office for National Statistics (ONS), revealed an economy that is continuing to shrink.

The normal definition of a recession is two consecutive quarters of economic contraction, which the UK recorded in the final quarter of 2011 (-0.3%) and the first quarter of this year (-0.2%). The media machine made much of the malaise, but from an investor’s viewpoint it was all rather overdone.

  • The ONS figures were preliminary, based on less than half the eventual gross domestic product (GDP) data that will be available. The final figure – some years away – could well be different. The Bank of England, for one, was notably sceptical about the accuracy of this first reading.
  •  The entire contraction could be blamed on just one sector: construction, where output fell by 3%. Sadly for the Treasury, the one area of clear growth was ‘Government & other services’, which rose 0.2% over the quarter.
  • For all the horror headlines, this recession is nothing like the slide the UK experienced in the immediate aftermath of the financial crisis. Three years ago, the first quarter of 2009 produced a 2.5% contraction. As the graph below shows, compared with that downhill run, the UK is now just about flat-lining.

For the major companies that are the constituents of the FTSE 100 index, the performance of the UK economy is far from crucial. Some FTSE constituents, notably the miners, have virtually no business in this country. Overall, it is estimated that nearly three quarters of the top 100 companies’ profits arise outside the UK.

It is generally the middle-sized companies (which from the FTSE 250) and their smaller brethren which are more exposed to the UK economic climate because of their greater reliance on domestic demand.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

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