The catastrophic effect of the coronavirus is rippling its way through economies, devastating businesses and crippling economic growth, and as if that wasn’t enough, in April, the cost of living pressures intensified and rising prices squeezed millions of households, with the average energy bill increasing by £700 a year.
Experts have warned that Britain is heading for the worst fall in living standards since the 1950s, with 1.3 million people facing hardship and resulting in consumers cutting back their spending and managing just on absolute necessities. As far as the experts are concerned, the question is not whether the economy will slow down but whether it is time to start mentioning the recession word. But a recession offers investment opportunities to the astute as our latest article explains…
What is an economic recession?
Since the Industrial Revolution, the long-term macroeconomic trend in most countries has been economic growth. Along with this long-term growth, however, have been short-term fluctuations when major macroeconomic indicators have shown slowdowns or even outright declining performance, over time frames of six months up to several years, before returning to their long-term growth trend. These short-term declines are known as recessions. In other words, a country’s finances aren’t growing, they’re shrinking.
What happens during an economic recession?
In a recession, people tend to save money because there is a fall in confidence. Companies will be producing less and therefore will need fewer workers, and sadly some firms will go out of business, causing workers to lose their jobs. If people expect to be made unemployed (or fear unemployment), then they don’t want to spend and borrow and saving becomes more attractive. But once a recession starts, it’s difficult to stop and can spiral out of control, with the consequences being severe for virtually everyone.
Some of the things that can happen during an economic recession are:
- Business profits take a hit and many go bankrupt.
- People lose their jobs.
- It becomes difficult to find work and make ends meet.
- In particular, young people entering the job market find it difficult to secure a job.
- Wages go down.
- People reduce their spending, invoking a paradox of thrift. This typically leads to reduction in aggregate demand and, consequently, economic growth.
- Many families have to relocate to avoid high rental costs or to find work. In this situation, children have to change schools and the family loses its social support network.
- Due to financial strain and other factors, families struggle and domestic violence increases.
- People struggle to pay their debts, which damages their credit scores. This makes it more difficult for many to borrow money in the future – which in turn contributes to more economic stagnation.
- People default on their debts and families lose their homes, cars, lands, and other assets.
- The real estate market is flooded with people who can’t afford their mortgages and those who need money. As a result, house prices go down. This is bad news for many people who rely on the equity they built up in their homes to fund their retirement.
- Business investments go down and it becomes harder to start a business.
- Interest rates go down as federal governments attempt to simulate growth.
- Most people have to reign in their lifestyle expenses. This means fewer leisure activities, vacations, dining out, etc.
A recession can offer opportunities to entrepreneurs
Certainly not for the faint hearted, but there will be opportunities to pick up high-quality assets at discounted prices as businesses are temporarily affected by the situation. Difficult environments are often where the best opportunities can be found and history shows us that a recession can indeed offers such opportunities. During the recession of 1973, Bill Gates, a Harvard dropout, started a small company specialising in developing computer languages as did FedEx, which, although founded in 1971 as Federal Express, didn’t start operating until the recession in 1973.
Therefore, Investing during a recession also has a positive side to it and although investors fear these economic downturns, they can also create some of the best buying opportunities and if you hold your nerve in recession and thrive, investment opportunities are there across all sectors.
Buying plots of land is one avenue. Land never loses steam and in times of recession, that means there’s a high demand to sell, especially for less than market value. Another option is the housing market. If faced with a recession, this will inevitably slow down and in general, buying a home during a recession will get you a better deal. The number of foreclosures or owners who have to sell to stay afloat increases, typically leading to more homes available on the market and lower home prices. Buy to let opportunities for investors may be beneficial as typically, mortgage rates can be lower during a recession. Lenders reduce rates to entice people into buying homes as it’s cheaper to secure a mortgage, thus helping to boost the economy.
How InvestGrow Financial Services can help investors
Whilst high street banks are reticent to lending in a recession, InvestGrow FS has access to over 250+ 2nd and 3rd tier lenders who will happily lend, albeit at slightly higher rates than the high street. We can put forward funding proposals to lenders and get decisions quickly on business loans, commercial mortgages, buy to lets, working capital, bridging loans, working capital etc.
We are already seeing an increase in enquiries from investors looking at opportunities and last week sent out an offer letter for funding of £1.3million for the purchase of a commercial recycling centre in Birmingham for a client.
If you’re an investor, now could be the time to start looking at opportunities. For further information on investment funding please contact us here.