Households, businesses and investors are facing the double threat of inflation running at multi-decade highs and a recession. Whilst intrinsically linked in a variety of ways, they are different economic phenomena.
Which is worse?
“Both of them are personal and both will have an impact,” says Nigel Green, CEO of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations.
“Soaring prices of food, housing, clothing, transportation and energy, amongst other things, will make a dent in the finances of everyone.
“But it will deliver a harder blow for those on lower incomes as the price jumps will take up a larger proportion of them.
“As inflation ramps up, people and firms have less money to spend on goods and services. Financial habits are adjusted, which can drag on economic growth throughout the wider economy.
“During a recession – typically defined as two consecutive quarters of negative gross domestic product (GDP) growth – people are laid off, wages often stagnate, and people generally have less money to spend.”
He continues: “Whilst extremely painful for those who lose their jobs and the businesses that fail, a recession is generally considered the lesser of the two evils because excessive inflation impacts everyone.
“Although it’s difficult and problematic for those affected, a recession typically corrects itself after about nine months.
“However, high inflation can create embedded price instability and prompt systemic economic decline.”
The Great Inflation of the 1970s is the most recent macroeconomic example of this situation. It was a painful period in which prices skyrocketed, markets plummeted, economic growth was weak and unemployment was rampant.
“Both inflation and recession negatively impact different aspects of economic activity, such as consumer spending and borrowing,” notes the deVere CEO.
“As ever, there are legitimate and proven ways that households and businesses can mitigate the potential issues coming down the track. Seeking advice could help you navigate the choppy waters.
“Similarly, for investors, where there’s turbulence there is always opportunity. There will be certain sectors which will always do well in a recession.”
He concludes: “Inflation vs recession. By knowing how these two different, yet connected, economic phenomena behave, you’ll make more informed decisions about your financial planning strategies and investment portfolio.”