‘An acceptable level of unemployment means that the Government economist to whom it is acceptable still has a job’.

                      Author unknown.  

Whilst economic experts debate whether we are all coming out of recession or are about to head into a double dip recession, it is worth taking some time to consider the possible impact on your investment portfolio of the twin evils of rising unemployment and the possibility of deflation. 

This article explains how unemployment and deflation may impact on the value of your shares. 

1.     What’s Deflation?

Deflation is a complex process but in simple terms means a process of lowering prices. It is the opposite of rising prices which is known as inflation. You might think that a process of deflation would be good for you, I mean lowering prices sounds great yes? Think again.

2.     Deflation is Serious Business

If deflation becomes embedded in the economy, prices decline, company profits decline, staff are laid off and unemployment rises. Then the cycle can repeat. This leads to economic uncertainty which in turn leads to reduced investment which in turn accelerates the whole process and you can see where this is heading.

3.     Share Prices Crash

In a process of deflation people panic as company profits fall and returns from equity investments do likewise, so they sell their shares and ensure that their fear is realised. This is all bad news for investors.

It is much harder for any Government to manage a period of deflation in contrast to inflation. Rising prices are much easier to control through reduced spending, taxation and higher interest rates to encourage saving.

4.     Are We Heading For Deflation?

Whilst economic recovery is far from a straightforward process, with both the USA and UK reporting volatility in unemployment figures and economic growth, it is not all bad.

Some businesses are doing well, and there is evidence of confidence returning amongst investors. In the UK the FTSE 100 has been buoyant recently, but if a week is a long time in politics then a day is in investing. It is the long term trends that matter.

Whilst unemployment is likely to remain relatively high for some years as public sector funding is cut, the private sector will start to grow. Just don’t expect it to be consistent growth, and be prepared for some volatility along the way, just as investing should be.

Jamie E Smith is the author of Making Money From Stocks And Shares

This content was provided by one of our users, Jamie