What is a recession and how could it affect me?


col branding

New figures have raised the possibility that the UK’s economy could fall into recession.

The economy shrank between July and September, according to the Office for National Statistics (ONS).

What is a recession?

In normal times, a country’s economy grows.

People’s incomes tend to rise as the value of the goods and services the country produces – its Gross Domestic Product (GDP) – increases.

But sometimes the level of GDP falls, and that’s a sign that the economy is doing badly.

A recession is usually defined as when GDP falls for two three-month periods – or quarters – in a row.

Is the UK in a recession?

Then, the economy grew in the first three months of 2023.

It will not be clear until February, when figures are released for October to December, whether the UK has entered or avoided recession.

In November, the OBR said that it expected the UK economy to grow by 0.6% this year, which was an upward revision from the forecast of a 0.2% contraction that it made in March.

However, the body also cut its growth forecasts for the next three years.

It currently forecasts the economy will grow by:

  • 0.7% in 2024 (down from its previous estimate of 1.8%)
  • 1.4% in 2025 (down from 2.5%)
  • 1.9% in 2026 (down from 2.1%)

How does the UK compare to other countries?

The latest data indicates that the UK’s economy has only seen faster growth than Germany since the end of 2019.

In October, the International Monetary Fund (IMF) predicted that the UK would grow by just 0.5% this year.

However, that is better than Germany, and would keep the UK out of bottom place for growth among the G7.

But it downgraded the UK’s prospects for next year, estimating the economy will grow by 0.6%, which would make it the slowest growing developed country in 2024.

Why does a recession matter?

For most people, economic growth is good.

It usually means there are more jobs, companies are more profitable and can pay employees and shareholders more.

The higher wages and larger profits seen in a growing economy also generate additional money for the government in taxes.

It can choose to spend more on benefits, public services and government workers’ wages, or cut taxes.

When the economy shrinks, these things can go into reverse – but governments normally still have a choice on public spending.

Image source, Getty Images

How would a recession affect me?

Some people might lose their jobs, and unemployment could rise. Graduates and school leavers could find it harder to get their first job.

Others may find it harder to be promoted, or to get big enough pay rises to keep pace with price increases.

However, the pain of a recession is typically not felt equally across society, and inequality can increase.

Benefit recipients and those on fixed incomes are particularly likely to struggle.

How can you get out of a recession?

When the economy is struggling to grow at the same time as there is high inflation, there can be a situation called “stagflation”, which is very difficult to solve.

When a country is in a recession, the Bank of England – which is independent of government – would usually cut interest rates.

This makes it cheaper for businesses and households to borrow money which can boost spending and growth.

How long have recent recessions been?

The recession in 2020 only lasted for six months, although the 20.4% reduction in the UK economy between April and June that year was the largest on record.

The previous recession started in 2008 due to the global financial crisis, and went on for five quarters.

Source link