This article is from our October 2022 edition of MarketWatch.
07th December, 2022
"Crisis fatigue is a response to the prolonged stress that develops due to unexpected or difficult events, such as war, economic depressions, or a pandemic"
-Medical News Today
The word ‘crisis’ has been part of the vernacular for the past several years. To name a few, with the COVID-19 Crisis, the Climate Crisis, and the latest one, the Cost of living Crisis – it’s no wonder that anxiety levels have shot up in recent years. As suffering becomes commonplace, we go through a phase of crisis fatigue. This is not the first time the world has faced such challenges but it is the most significant in recent history.
During World War II, to promote strength in the face of adversity, the British government produced posters with the famous mantra “Keep Calm and Carry On”, we may need to reach for it now as our resilience is put to the test yet again. Currently, the cost of living crisis is the latest thing to grapple with and though we may want to, it’s hard to bury our heads in the sand when our financial potential is being eroded.
On top of this, economic pessimism is beginning to take hold across global economies as we face winter physically and metaphorically. After a long and painful COVID-19-induced hibernation, the brief optimism that prevailed at the beginning of the year has now been worn down and the prospect of the roaring 2020’s that we alluded to in a previous MarketWatch edition has been extinguished for now. Geopolitical uncertainty, coupled with soaring prices, is taking its toll on both businesses and consumers, with some having longer lasting effects than others.
The rippling effects of the war in Ukraine and the subsequent energy crisis are affecting people worldwide. According to the UN Development Programme (UNDP), 71 million people in developing countries are falling into poverty as a result of the increased costs of energy and food. Developed countries are struggling too, with inflation figures year on year to September of 8.2% in the US and 10.0 % in the Euro Area – levels not seen for circa 40 years.
Wage growth hasn't kept pace with record inflation, considerably weakening purchasing power. However, governments and policymaker intervention has been strong. In an effort to ease the impact of inflation, we’ve witnessed measures including tax cuts, free and subsidised travel, energy subsidies and caps, cash transfers, and significant raising of interest rates by central banks. In the EuroZone alone, close to €300 billion has already been spent on cost of living measures.
Some components of inflation are sticky (longer lasting) e.g. rent and medical care and some are slippery (temporary) e.g. oil prices. The question of how long this period of inflation will last is up for debate but some consequences could be felt for a long time. This includes a demographic cost to the cost of living crisis.
In the UK context, the pain has arguably been worst felt, disproportionately affecting young people. It was reported in July that disposable incomes for the under-30’s had fallen by 21.6% year on year (YoY) as youths are grappling with a sharp increase in spending on essentials such as rent, groceries, transport costs and utility bills. A separate study, carried out by the Prince’s Trust found that almost half (46%) of UK youths fear not having enough money to buy essentials, while over a third are planning to leave education for employment. With this pressure for survival, the prospect of milestones such as graduating university and eventual home ownership become ever more elusive.
In the Irish case, a recent study by RedC identified that 70% of young people (18-24) are considering emigrating, with 80% fearful for the future. For context, a similar youth poll to the recent RedC one in 2012 found just 51% were contemplating emigrating at that time. Mass emigration of younger generations has both a social and economic impact that can permeate society for generations to come. Emigration isn’t anything new, Ireland’s long history of it has seen an estimated 10 million people leave since 1800. People leave for either push or pull factors. Previous crises such as famines and economic crashes “pushed” people out. In the past several years, with a healthy economy and high average living standards, people left primarily for “pull” factors such as career opportunities and adventure. The pendulum has swung towards “push” again and many find the prospect of building a life impossible with extortionate costs of living. It’s little surprise, as Ireland is the EU’s most expensive country, with housing costing as much as 84% more than the bloc’s average between 2010 and 2020.
Small and medium-sized enterprises/businesses (SMEs/Bs) are also taking a hit from the current situation, at a time when they were recovering post pandemic. On a global level, Meta’s recent Global State of Small Business Report identified input inflation, supply chain disruptions, and threats of recession as top concerns. However, promisingly, they identified a small decrease in SMBs reporting closures and a sizeable increase in the proportion of SMBs reporting higher sales. Close to home, during the COVID-19 period, small, indigenous businesses received an upsurge in support and demand. For lack of alternative options for spending, a greater share of wallet could be dedicated to higher spend on items from local brands – “Support Local” was the call of the day. Now, with rising costs of energy and materials, the environment has become more challenging and 63% of Irish SMEs are concerned about the rising cost of doing business in the year ahead according to Google Ireland.
The opposite of a crisis? There isn’t one word to describe the opposite of crisis, just like there’s no one tactic for reacting to it. Undoubtedly, there will be many more to come in the future but whilst “keeping calm and carrying on” may be difficult for our personal resilience, that is exactly the right approach when it comes to your investment portfolio. As investors, we will be facing into challenges but the advice remains the same. With the constant barrage of bad news, it’s important to remember that bull markets and bear markets come and go and therefore, it’s better to focus on where you are in your life cycle than the economic cycle. We have come through crises before and we continue to hold firm. As long as your financial plan is up to date and reflective of your current situation and goals, the best way to react to this current crisis at hand is to keep calm and...