How to invest during a 'rolling recession'

The UK’s recession wasn’t ‘revised away’ when updated figures were released last month – although we did get a clearer sense of what caused it. Revised estimates showed that the contraction, though mild (as the chart shows), was broad-based. The three main sectors of the UK economy contracted in the final quarter of 2023, with output falling by 0.9 per cent in construction, 1.1 per cent in production and 0.1 per cent in services. 

The good news is that the downturn is probably already over. We will have to wait until first-quarter gross domestic product (GDP) estimates are published in May to be sure, but figures for the first two months of the year look encouraging. Monthly real GDP grew by 0.2 per cent in January, and by 0.1 per cent in February. Yael Selfin, chief economist at KPMG, said that “the economy’s ongoing recovery is the latest piece of evidence that the shallow technical recession is already behind us”. 

But this doesn’t mean that the recovery will be uniform. Economists sometimes talk about a rolling recession, where different sectors of the economy contract in turn. There is every chance that we could see a rolling ‘recovery’ as the economy improves, and some areas are faring better than others.

Although last year proved bruising for manufacturers, things are already looking up. April’s manufacturing Purchasing Managers Index (PMI) saw the index return to growth for the first time in 20 months, and business optimism about the year ahead is rising thanks to stronger domestic demand. Economists at KPMG anticipate that access to finance should improve alongside a more benign interest rate environment this year, leading to stronger investment growth in 2025. 

Although the domestic picture looks better, PMI data shows that overseas demand is still falling. EU export performance remains weak, while disruptions in the Red Sea continue to disrupt supply chains. KPMG economists warn that the uncertainty of upcoming elections and a more fraught geopolitical environment could hamper investment plans – especially for firms significantly exposed to trade. 

If PMI figures are anything to go by, demand conditions are picking up in the construction industry, and optimism is rising. As a whole, 2024 should provide a better backdrop for the sector, thanks to lower interest rates and a housing market recovery – but progress might be uneven. We could see house prices and mortgage approvals fluctuate as consumers hold off for better deals in anticipation of interest rate cuts later in the year. 

Nevertheless, economists expect more housing transactions to trigger higher spending on furnishings, carpets and appliances in 2024. This could deliver a significant economic boost: the higher cost of living has decimated spending on these kinds of ‘delayable’ products, and it is still 25 per cent below pre-pandemic levels. A ‘wealth effect’ from rising house prices could also leave households feeling flush – but whether they go out spending is another matter. 

In theory, the outlook is brighter for UK consumers this year: wages are growing faster than inflation, unemployment remains low, and rate cuts should be on the horizon. But higher mortgage rates are still passing through the economy, and Bank of England forecasts imply that unemployment will climb to almost 5 per cent over the next two years. Economists at KPMG think that this could raise the level of ‘precautionary savings’, allowing for only modest spending growth.

It's also worth flagging that higher interest rates have had an unusual impact on household finances in this cycle. In 2023, households were better off on average as a result of higher interest rates, as income from savings significantly offset the increase in debt interest costs. Paul Dales, chief UK economist at Capital Economics, thinks that “future interest rate cuts might not boost the economy much”, as a result. The milder drag from interest rates has probably helped to make the recession milder, but it could also make our recovery more subdued.