What you need to know about the UK going into a recession
- Credit: Archant
This morning the Office for National Statistics (ONS) announced that the UK had officially entered a recession for the first time in 11 years.
Here is what you need to know about how it could affect you.
• What is a recession?
A country is in recession when its economy contracts for two quarters – a total of six months – in a row.
Normally, when a country is healthy and stable, the economy grows over time.
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This growth can be measured by totalling up all the goods and services that the country produces. This is called Gross Domestic Product (GDP).
But now the ONS has said that GDP fell by a record 20.4% between April and June after falling by 2.2% in the first three months of the year.
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This means the country is officially in recession.
Despite the fact that the economy bounced back by 8.7% in June the Bank of England forecasts that the economy will not be back at pre-Covid levels until the end of 2021.
• How might this impact jobs?
Job cuts are one of the usual outcomes of a recession.
Redundancies are often one of the last effects of a recessions to be seen. But as every recession has different causes each plays out differently.
Because this recession was caused by the coronavirus lockdown the furlough scheme is already in place. How deep the job cuts from this recession are may depend on if the government ends the furlough scheme as it originally planned.
Chancellor Rishi Sunak said that the ONS figures “confirm that hard times are here”.
“Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will.
“But while there are difficult choices to be made ahead, we will get through this, and I can assure people that nobody will be left without hope or opportunity.”
Those in work could actually see themselves worse off too.
That is because real wages – the amount people have in reality when adjusted for inflation – is falling.
In a recession our purchasing power tends to be pressurised because wage increases are behind the rising rate of inflation – currently at around 0.8%.
• Do products get more expensive during a recession?
It is unlikely the price of your weekly food shop will go up.
That is because when real income – the amount of money you have in your pocket when adjusted for inflation – is squeezed, shoppers tend to buy less.
Because of this lack of consumer confidence businesses are actually more likely to cut costs to try and attract more people to their products and services to at least cover their base costs and stay in business.
This is more likely to be seen on higher-ticket items and luxury buys because these are the sales which aren’t essential and relatively easy decisions to make.
However for cheaper products like those sold in Poundland or fast-food eateries it is unlikely prices will be axed, because they may in fact see a rise in demand as consumers look for more budget-friendly options.
• Will we go back to austerity measures?
Many of us understandably hear the word recession and automatically think austerity.
Austerity measures see the government axing public spending in a bid to get its balance of payments on an even keel again.
However it is entirely unlikely that following the pandemic the government will axe their spending, given how vital this crutch has been to the economy since March.
Indeed, experts at the Centre for Macroeconomics (CFM) unanimously opposing austerity suggestions.
Following a discussion with experts at CFM, Simon Wren-Lewis at the University of Oxford said he was opposed any budgetary deficit reduction unless interest rates began rising.
University College London’s Wendy Carlin also suggested that the discussion should be shifted from public debt concerns to “minimizing the damage to education, research and development, investment, start-ups etc. and on supporting incomes until economic activity can resume.”
And even right wing policy commentators who advocated austerity a decade ago have rejected the idea.
Warwick Lightfoot, chief economist at Policy Exchange (formed in 2002 by Michael Gove), said: “I don’t think anyone is arguing for a relaunch of austerity. Even an austerity hawk believes it is different this time.
“The last thing you want to do is amplify the prospects of a full-blown depression.”