Is a Recession Imminent?​

By Jake Rickman​

What do you need to know this week?

Is a recession looming? Are we in one as we speak?

Technically, a recession is defined as two or more quarters of negative GDP growth. In the UK, Q1 2022 growth was 0.8%, with negative growth in March. This means that we are still not technically in a recession, though that might change in the coming months.

All the same, it is now undeniable that the global economy is under strain: inflation has reached record highs in countries across the world, with the United Kingdom experiencing the highest rate in Western Europe at nearly 9%. This is mostly owed to the surging costs of energy and food, which has been driven up by a flurry of factors largely arising from supply chain issues induced by the COVID-19 pandemic. Russia’s aggression in Ukraine has further magnified inflationary pressures.

While inflation in and of itself does not necessarily contribute to a recession., problems arise when consumer spending habits change across the board in response to rising prices. This is something we are now seeing as of April in the UK — the overall consumer confidence is at its lowest point since the 1970s. In plain terms, people are spending less. This means there is less demand for goods and services. If this trend persists, growth (GDP) will slow or even stall completely… queue a recession.

Why is this important for your interviews?

At the end of the day, the legal market is driven by wider market trends. Understanding these broad market movements is necessary to appreciate the strategic and financial position of clients. It therefore follows that if these structural trends persist, an increasingly salient interview prompt may be: “What does the current market environment mean for our clients?”

Aside from the financial services market, most sectors rely on consumer or business demand to sustain their growth. If this demand slackens, a business’ sales and earnings will drop. From the client’s perspective, this is manifestly less than ideal. When there are fewer earnings, clients will be poorly positioned to engage in growth activities like acquiring other companies, expanding into new markets, and partnering with other brands — activities which require a team of legal advisors.

Of course, credit in an interview will be given for “contrarian” considerations: declining financial performance across the board is strongly correlated with credit defaults and contractual breaches. In such cases, legal advice is as necessary as it is for positive portends.

How is this topic relevant to law firms?

In a big-picture sense, law firms tend to be resilient. Even during the 2007-2008 Global Financial Crisis, the legal industry managed to come out the other end largely intact.

However, short-term considerations can be less rosy. If we consider that much of the surge in trainee and NQ salaries is due to record rates of deal making — activity strongly correlated with positive economic indicators — if the bottom falls out, the demand for associates in such transactional teams will likewise drop.