Britain is in recession. After standing still from April to June, the UK economy shrank between July and the end of September. The smart money is now betting on a second three-month period of declining output, which would meet the textbook definition of a recession. But what does all this mean for you and your money?
It's a long time since Britain last entered recession. On the most recent occasion that the economy began to shrink, Paul Gascoigne was shedding tears at the World Cup in Italy, shell suits were the height of fashion and Kylie and Jason were topping the charts. After the slump ended in the autumn of 1991, we enjoyed a record 17 years of unbroken growth. So, you’d be excused for having forgotten what a recession is like and what you need to do to protect yourself.
Fortunately, the history of British boom and bust since the Second World War contains some valuable lessons for investors. We’ve gone back over the last seven slumps to answer some of the most pressing questions and to find the investment strategies that have worked best during a downturn.
The recession could be long and deep
The standard definition of a recession is two quarters of shrinking economic activity. So, six months is the shortest time a recession can last. Using this rule, the recession will only be confirmed after the end of December, even though it’s obvious that we’re already in one.
Since 1956, the average UK recession has tended to last just two quarters, the minimum possible length. Therefore, by the time the recession has been statistically confirmed, it has typically already ended. However, the most recent two downturns – in the early 1980s and early 1990s – lasted a good deal longer than this, at five quarters apiece. More gloomy commentators believe that we are probably in for a repeat of those drawn-out slumps this time around. If so, the economy could still be contracting for most, if not all, of 2009.
