What is a recession and how could it affect me?

[Bong Hwan Ahn]

What is a recession and how could it affect me?

Share

The UK narrowly avoided a recession in 2022 despite shrinking in December.

• UK to see shorter recession, says Bank of England

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.

ADVERTISEMENT

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

The last time the UK's economy went into recession was in 2020, at the height of the coronavirus pandemic.

Is the UK in a recession?

The Office for National Statistics (ONS) says the economy saw zero growth between October and December 2022.

But in December alone the economy shank by 0.5%, partly due to strike action across rail and postal services.

The Office of Budget Responsibility (OBR), which provides independent advice to the government, expects the UK economy to shrink by 1.4% in 2023.

The OBR forecasts growth of 1.3% in 2024 and 2.6% in 2025.

Despite avoiding a recession, the UK is now the only country in the G7 with an economy that is smaller than it was before the pandemic.

• Brexit adding to cost-of-living crisis - Carney
• What is the UK inflation rate and why is the cost of living rising?

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 more 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 do still have a choice on public spending.

What is happening around the world?

Other economies are struggling, according to the International Monetary Fund (IMF) - an international organisation with 190 member countries.

However, it expects the UK to be the only major economy to shrink in 2023.

• What is the IMF and why does it matter?

It will perform worse than other advanced economies, including Russia, as the cost of living continues to hit households.

High energy prices, rising mortgage costs and increased taxes, and persistent worker shortages are dragging on the UK economy, the IMF said.

How would a recession affect me?

Some people may 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.

• Record wage rises still outpaced by soaring prices
• What's the gap between public and private sector pay?
• How much is spent on benefits?

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 be expected to cut interest rates.

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

However, with prices rising so quickly, the Bank has chosen to increase interest rates instead.

• How high could interest rates go?
• Why does the Bank of England change interest rates?

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.

• How did the 2008 financial crisis affect you?