The Bank of England has just warned that the UK is facing its biggest recession in 100 years – is the US next?  Here are 3 reasons why a 2023 recession will be unlike any other

The Bank of England has just warned that the UK is facing its biggest recession in 100 years – is the US next? Here are 3 reasons why a 2023 recession will be unlike any other

The Bank of England has just warned that the UK is facing its biggest recession in 100 years - is the US next?  Here are 3 reasons why a 2023 recession will be unlike any other

The Bank of England has just warned that the UK is facing its biggest recession in 100 years – is the US next? Here are 3 reasons why a 2023 recession will be unlike any other

The UK can’t seem to catch a break. First, it lost its longest-serving monarch this fall, and just weeks later its shortest-serving prime minister resigned.

Now its central bank, the Bank of England, is warning that the country is on the brink of its worst recession in a century as it pushed ahead with its biggest rate hike since 1989.

Announcing the 0.75% rate change to bring the current Bank Rate to 3%, the UK’s monetary policy committee acknowledged it faced a “very challenging outlook”.

And at a press conference after the announcement, Andrew Bailey, the bank’s governor, said he realized the tougher interest rate policy would be a sting for Britons. But with UK inflation now at 10.1%, Bailey added: “If we don’t act strongly now, it will be worse later.”

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But with the close relationship between the US and the UK – every US state has jobs linked to an investment by a British company, and nearly 1.3 million Americans work for British companies in the US, according to the US State Department – where does this lead us?

While no one likes to see their allies struggle, there are some good reasons to believe the situation won’t be as dire on this side of the pond.

The labor market is robust

In most recessions, economic output and employment fall simultaneously. Lower revenues force businesses to cut staff, which leads to higher unemployment. Ultimately, higher unemployment leads to lower consumer spending and this creates a vicious cycle.

In 2022, however, unemployment is still at an all-time low. The official unemployment rate in October was 3.7% — a slight increase from the previous month, but close enough to pre-pandemic numbers in February 2020. A strong job market is “historically unusual” during a recession, according to with Goldman Sachs economists.

This unusually strong labor market could be drawing strength from another unusual source: corporate financial strength.

Companies are cash rich

Companies see a decline in sales and profits during a recession. This process may have already started. However, corporate America is holding onto profits and sitting on a huge cache of cash entering this recession.

Read more: Grow your hard-earned cash without the volatile stock market with these 3 easy alternatives

The average American company’s after-tax profit margin is about 16% right now — the highest since 1950. In traditional recessions, that rate falls into the single digits. Meanwhile, these companies collectively have more than $3 trillion in cash. This is a record level and also highly unusual for a recessionary environment.

Companies may have raised these funds during the era of easy money and low interest rates over the past decade. Now, that cash acts as a buffer and could allow companies to keep staff despite an economic slowdown.

The hawkish attitude of the Fed

Another unusual factor in this recession is the aggressive stance of the Federal Reserve. In most recessions, the central bank cuts interest rates and adds more money to the economy to stabilize it.

In 2022, however, the Fed aggressively raised interest rates to curb inflation. Given the strength of the labor market and corporate balance sheets, the central bank may have more reason to keep raising interest rates.

What’s next?

“This is unsustainable,” says the WSJ’s Jon Hilsenrath. He believes one of two things must happen to resolve this misalignment: either the economy recovers quickly, ending the recession, or the economy continues to sink, forcing employers to cut jobs.

Those two scenarios could potentially be the “soft landing” and the “hard landing” that the Fed mentioned earlier. Investors should monitor all indicators to see which scenario is playing out because the impact could be severe.

This could be the perfect time to bet on the downside of growth and tech stocks if a soft landing occurs. However, in a hard landing, investors may need to turn to defensive stocks backed by assets such as health care companies and real estate investment trusts.

In any case, 2022 and 2023 will undoubtedly remain interesting years for investors.

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This article provides information only and should not be construed as advice. Provided without warranty of any kind.

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