65% of Institutional Investors Think Stagflation Is Bigger Concern Than Recession

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KEY POINTS

  • In a recent survey, almost two-thirds of institutional investors said stagflation was a bigger concern than a recession.
  • Stagflation involves high inflation, high unemployment, and slow growth -- all at the same time.
  • Take steps to shore up your financial foundations by paying down high-interest debt and beefing up your emergency fund.

If you're not sure what stagflation is or whether we should be worried, read on.

The ugly prospect of stagflation is on the minds of many institutional investors right now. In the 2023 Natixis Outlook Survey, which asked over 500 institutional investors about their outlook for next year, almost two-thirds said they think stagflation is a bigger risk than a recession. Find out more about what stagflation is and how worried we should be.

What is stagflation?

Stagflation combines the words inflation and stagnation. The reason fund managers and other institutional investors are worried is that it's the worst of all worlds, economically speaking. Periods of stagflation usually involve high inflation, high unemployment, and slow economic growth. Not only could prices continue to rise, but people might also lose their jobs as the economy slows.

It's worth knowing that stagflation is rare -- the only time it's really happened in U.S. history was back in the 1970s. The issue is that several economists and leaders, including the World Bank, think there could be parallels between what's happening now and what happened fifty years ago.

How worried should we be?

One reason institutional investors are particularly worried is that stagflation is difficult to handle and if it sets in, it can last longer than a recession. If it comes about, it will be challenging. All the same, just because something is a bigger concern that doesn't mean it's more likely to happen.

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The issue is that if inflation continues to increase and if there's a crossover with an economic decline, we could enter stagflation territory. But those are big ifs. Indeed, we don't even know for sure whether we'll hit a recession, never mind stagflation. The economic fallout from the pandemic slowdown and related stimulus measures has sent a lot of indicators topsy-turvy. And even in relatively normal times, economists often don't agree.

The Federal Reserve is increasing interest rates in an attempt to get inflation under control. Part of the reason there's so much uncertainty is that it takes time for the impact of rate hikes to show in the wider economy. We know that things will slow in 2023, but we don't yet know by how much, nor whether it will trigger a recession.

How you can prepare for stagflation

The headlines are full of potential doom and gloom next year, but there's not a lot that regular Americans can do to stop whatever might unfold. The best antidote for worry is often action, so if economic fears are keeping you up at night, try to channel those feelings into concrete steps.

Preparing for stagflation is a bit like preparing for a recession. It's about making sure you can handle an unexpected job loss and cope if prices increase as they did last year. Here are three steps to take.

1. Make a budget

If you don't have a good idea of where your money goes each month, take some time in January to make a budget. It doesn't have to be complicated, and there are budgeting apps that can help. What's important is to understand what you spend in comparison to what you earn, and identify potential areas where you can cut back if necessary.

2. Prioritize your emergency fund

Having three to six months' worth of living expenses tucked away in a savings account gives you a decent cushion against any economic craziness that might unfold. If you're really worried, you might even aim to put more cash into your emergency fund.

Unfortunately, inflation has meant some Americans have dipped into their reserves to cover essentials this year. If that's your position -- or your emergency savings aren't where you want them to be -- don't panic. Look at your budget and see if there's anything non-essential you can cut to give you some extra cash.

If you can't find any wiggle room in your spending, see if you can take on some extra hours at work or even get a side hustle. Right now the job market is relatively strong, which may make it an extra time to pick up additional work. Sometimes it's easier to increase your income than cut your outgoings.

3. Pay down high-interest debt

The repayments on credit card or other high-interest debt can make a sizable dent in your budget each month. On top of which, you'll have to pay interest on what you owe. This can get expensive, particularly with interest rates increasing.

It's unlikely you'll be able to pay off your debt overnight. But try to set achievable goals based on your financial situation. There are different ways to pay down debt, so look at what route would work best for you. Once you make a plan, find ways to celebrate when you reach milestones.

It isn't an easy process. Try to remember that every step you take will make it easier to handle stagflation and strengthen your financial position. Even if the economy doesn't worsen next year, paying off what you owe could improve your credit score and give you more disposable income for other expenses.

Bottom line

There are a lot of reasons to be concerned about what might happen to the economy in 2023, but nobody knows what will actually happen. If you focus on the things you can control, such as your budget and your bank account balance, you can't go far wrong. The stronger your financial foundations are, the better positioned you'll be for a recession or a period of stagflation.

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