The word “recession” has been thrown around a lot this week – but was is it, and is the UK already in one?
Here’s everything you need to know.
What is a recession?
A recession defines when an economy shrinks for two quarters in a row.
The year is divided into four three-month quarters – the first quarter of every fiscal year in the UK runs from the first of January until March, the second from April until June, the third July until September and then October until the end of December.
An economy shrinks when people are spending less, meaning it normally happens when there is another pressure on people’s finances such as inflation or a cost of living crisis.
GDP (Gross Domestic Product) is the “measure of the size and health of a country’s economy”, according to the Bank of England’s website. It’s the total market value of consumer goods or services produced within a country over a particular time frame.
Recession are usually accompanied with a spike in unemployment levels.
What did the Bank of England say?
The Bank of England just warned that the UK is teetering on the edge of the longest recession in 100 years, lasting right through to the middle of 2024.
This would mean being in the longest recession “since records began”.
It also predicted a “very challenging” two-year fall in employment levels, with unemployment potentially doubling to 6.5%.
This is a more alarming message than the Bank sent back in August (prior to the economic chaos the short-lived mini-budget brought). At the time, the Bank predicted a recession would last more than a year.
Does that mean the UK is in a recession now?
Well, the UK’s GDP fell by 0.2% during the second quarter (between April and June) of 2022.
If – as the Bank of England has predicted – the GDP fell by an extra 0.1% in the third quarter (July until September), then the UK has fallen into a recession. We just don’t have the data to confirm it just yet.
What has caused this recession?
The UK is in a recession because inflation – the rate at which the price of goods and services increases – has risen to a 40-year-high.
With prices 10.1% higher, people are buying less, limiting growth.
And inflation stems from the climbing price of energy (triggered by the reopening of worldwide economies after the pandemic lockdowns and the war in Ukraine), along with soaring food prices.
The UK labour market is also much smaller than it was prior to Covid.
How deep will it be?
The recession is not expected to be as deep as the downturn that followed the financial crash of 2008.
That means it won’t shrink to the extent that it did in the immediate aftermath of the financial crash, although we can’t know this for sure just yet.
There are many other factors still at play despite the Bank’s best efforts, such as the government’s fiscal statement which will be announced on November 17 and the ongoing war in Ukraine.
When will it end?
Growth is expected to decline by 0.75% in the second half of 2022.
According to forecasts, it will still fall throughout 2023 and the first half of 2024, driven by energy prices and tighter financial conditions.
At the moment, that means it’s predicted to last around five quarters – 15 months.
The Bank expects inflation to peak at around 11% in the last quarter of 2022, but it should start to decline and be below the target level of 2% within two years.
When was the last UK recession?
The UK fell into recession during the pandemic in August 2020 as so much of the economy was ground to a halt during lockdown.
The UK’s GDP dropped by 20.4%, as people were pushed out of work or furloughed.
The UK was also in a recession in 2009 after the 2008 crash, when GDP fell by 7%, and the economy did not start to grow again until the final quarter of the year.