In March, the UK economy experienced its worst monthly performance since the Office for National Statistics (ONS) started calculating monthly data back in 1997. The fall in GDP of 5.8% was worse than in any single month during the financial crisis.

With the UK now heading towards recession, experts are divided as to exactly what the economic recovery will look like when it finally comes. To help your clients understand what the future might hold, here is a look at some of the possible scenarios, and what might happen to investment markets.

What will the UK economic recovery look like?

Experts anticipate four possible scenarios for how the UK economy will bounce back after the pandemic eases.

  1. The V – This is essentially a quick return to normal, and it’s supported by the fact that there was a strong economy and stock market prior to the pandemic.
  2. The U – This is a longer return to normal, with lockdown removal taking place gradually with some countries taking longer to recover than others.
  3. The L – A much slower recovery, which could happen if health concerns continue or if the lockdown and pause of businesses is extended for prolonged periods.
  4. The W – In this scenario, there would be a recovery similar to the V, but then be hindered by a second wave of Covid-19 cases.

The difficulty with predicting the outcome is that no one knows for sure what will happen. So many factors are in play – the number of new cases of coronavirus, the ‘R’ rate, a possible vaccine, the success of ‘test and trace’ policies – that it is hard to predict the shape of the recovery. It’s therefore also hard to provide clear evidence on how stock markets might react.

Professor John Turner, a financial expert from Queen’s Management School, fears the government’s package of financial support for employees and businesses will only act as a temporary sticking plaster over inevitable and dire economic consequences in the future.

He suggests the economy is more likely to experience a long and painful recovery process with the after-effects lingering for years to come.

He says: “A lot of people are talking about a V-shaped recovery. Imagine we’ve been playing a piece of music and we’ve pressed pause for a few weeks and the dancing stops. And suddenly when we press play again, the dancing starts where it left off and everything will be back to normal in the economy.

“That’s a very optimistic view in my eyes because people are not all of a sudden going to go out and spend money again. They are going to be more cautious – some will have lost their jobs, and others, anticipating higher taxes and rising inflation as a result of government bailouts, will cut back on their consumption. If people aren’t going to spend money, that is going to dampen the economy for a long, long time to come,” he adds.

Volatility likely to continue

Recent weeks have witnessed some of the most volatile stock market conditions in living memory.

Back in mid-March, the Dow Jones experienced its biggest one-day fall since 1987. Then, the US S&P 500 rose by 12.7% in April, its biggest monthly rally since January 1987. Global stocks enjoyed their best month since 2011.

As far as clients are concerned, the markets are likely to remain extremely volatile as investors consider the effect of Covid-19 and the measures aimed at easing its economic impact. There was a 700-point difference between the FTSE 100’s highest and lowest day-end figures in April.

One of the consequences of the pandemic is that clients who rely on income from equities to fund their lifestyle could potentially see that income reduce.

HL head of investment analysis Emma Wall says: “In recent weeks, dozens of companies have announced that dividends and share buybacks will be scrapped, suspended or delayed.  ‘This could put pressure on investors who rely on the natural income from stock dividends – particularly those in retirement.

“What we can say is that for all investors – whether you’re focused on income or growth, in retirement or decades off drawing a pension – the successful lifting of restrictions will be key in liberating the stock market and the economy.”

Of course, volatility in markets can also affect the value of your clients’ pensions and investments. We’ve considered the impact of coronavirus on pensions elsewhere.  So, taking expert advice could be key to clients ensuring they can still retire in line with their plans.

Get in touch

If you have any clients that would benefit from reviewing their pension or investment portfolio in light of recent market volatility, please get in touch with us. Email or call 0116 2407070.