Advertisement
News

What is a recession and what does it mean for me?

Negative economic growth means only one thing: a recession could be coming. Here’s what that means for you.

The UK has narrowly avoided entering a recession, with GDP remaining flat from October to December 2022, new figures have revealed. 

However, a recession is still expected by the Bank of England this year, accompanying high inflation and stagnant wages.

For anybody with memories of 2008, and the subsequent austerity policies, the word recession brings with it not just short-term pain but long-term consequences.

So what do all these economic terms really mean, and what effect will they have? We’ve got you covered.

What is a recession?

A recession is defined as two successive quarters of negative GDP growth. Essentially, it’s six months where the economy shrinks.

The Bank of England said in early November that the UK was already in a recession  but then the economy unexpectedly grew that month. Then on February 10, new GDP statistics showed the UK experienced no growth in the last three months of 2022, avoiding a recession by the barest of all margins.

Advertisement
Advertisement

That doesn’t mean it’s not coming. In January, the IMF predicted that the UK’s economy would contract by 0.6 per cent from the end of 2022 to the end of 2023.

There had previously been warnings that the UK faced its longest-ever recession, but by February the Bank of England said the contraction would last around one year rather than the previously expected two.

In total, a fall in wholesale energy prices mean the economy will shrink by 1 per cent rather than the old expectation of 3 per cent. Bank of England governor Andrew Bailey said inflation will fall “rapidly” thanks in part to these lower energy prices.

Inflation hit 11.1 per cent in November 2022, before falling to 10.5 per cent in December, meaning average prices were 10.5 per cent higher than they were at the same time the previous year. For people already in poverty, inflation is often much higher as the prices for cheaper products increase more.

It’s the cost of living crisis in a nutshell: higher prices, lower spending, fewer products sold. All the hallmarks of a shrinking economy.

What happens in a recession?

In a capitalist economy like the UK’s, negative economic growth often means that people are spending less money and this has some serious knock-on effects on prices, employment, savings and more.

 If people are struggling to pay their bills they are likely to spend less on products. Businesses look for ways to stay open, so cut costs and raise prices. The higher prices means demand goes down again and the cycle of inflation can deepen.

As businesses cut costs, they also cut jobs.Unemployment currently sits at 3.7 per cent. But as the economic situation worsens, this is expected to shoot up. The Bank of England previously forecast unemployment to rise to 6.4 per cent, but revised that on February 3 down to 5.3 per cent.

Higher unemployment can mean the government decides it has to spend less money – as the 2010 coalition government did. The resulting austerity led to cuts in public services.

As inflation rises, the Bank of England also raises interest rates, to stop people borrowing money and potentially fuelling inflation further. Rising interest rates mean higher mortgage costs and campaigners have warned this could push more people into homelessness as homeowners can’t meet their payments and landlords put rents up.

Rebecca McDonald, chief economist at the Joseph Rowntree Foundation said: “With interest rates reaching their highest point for a generation, people who are already in poverty could be pulled in deeper due to the cost of getting into expensive debt to afford essentials. 

“There is also a larger group of people at risk of being pulled into poverty due to the impact that rate rises have on housing costs.”

Dr George Dibb, head of the centre for economic justice at the IPPR think tank, said the UK was an outlier even though it had avoided a recession for the last quarter of 2022.

“Unlike other countries that have returned to post-pandemic growth, the British economy is stagnating, and it will be the living standards of ordinary families that suffer,” he said.

What is happening to combat the recession?

The Bank of England, the government, or both bring in new policies to try to bring down prices, support households and businesses, and stabilise the economy.

At the start of February the Bank of England raised interest rates to 4 per cent – the highest amount in 14 years. This was an attempt to slow borrowing and bring inflation down, but it also means everyday costs like mortgages and credit card debt become more expensive.

Bear in mind inflation falling does not mean prices fall – they’re still going up, but just by slightly less.In November, Chancellor Jeremy Hunt announced increased taxes and cuts to spending in a bid to plug a “hole” in the public finances. However, this hole is contested, with experts saying it’s just shorthand for whether the government will hit targets it has itself chosen. And as hundreds of thousands of workers go on strike, the government argues that wage increases would simply fuel inflation.

What should you do in a recession?

It’s scary, but there are things you can do to make it less painful.

We’ve put together a full list of advice, from personal finance expert Brean Horne, here. But in brief, here’s what you can do to make sure your finances and career are well-equipped to weather the storm.

First, get a hold of your spending habits as soon as possible. Check what you can cut out and where your priorities are – even if there’s not much slack, you might discover hidden expenses.

Then, figure out which debts need prioritising. Debts with high costs, like credit cards, or overdrafts, should be prioritised.

If you can, try to build up an emergency savings account with any money you can spare – sending it automatically to an ISA or high-interest savings account might be the way forward.

Next, take a look at your credit score and explore the ways you can build it up. This will help if you need an affordable loan in the future.

Recession-proofing your career might sound haughty, but think about the skills you have, and how you might be able to expand those. If the job market tightens, having more strings to your bow will stand you in good stead.

Who benefits from a recession?

Bluntly, recessions tend to be a squeeze on average workers while providing a glimmer of opportunity for those with the money to manoeuvre.

Higher interest rates being used to reduce inflation typically benefits those with money in the bank, as the value of those savings increases.

Meanwhile, those with money to invest while the market is in a slump can see themselves catapulted to longer-term gains – assuming things get better.

And when interest rates fall as a recession lifts, with central banks trying to get people spending again, those looking to get on the housing ladder can find a mortgage is typically cheaper.

Almost two thirds of young people fear for their generation’s future – and 1.3 million people are predicted to plunge into poverty by 2023. We’re fighting that with our new campaign: Big Futures.

Sign ouropen letter here, calling for decent and affordable homes for all, an end to low-wages and for investment in young people, and for millions of green, well-paid jobs.

Advertisement

Sign our petition to keep people in their homes

Urgent action is needed to prevent even more people being pushed into homelessness.  A secure home is the first step in addressing the cruel cycle of poverty to ensure people can fulfil their potential. Join us to keep people in their homes.

Recommended for you

Read All
'Profoundly worrying': Could Tories drop much-needed Renters Reform Bill like its net zero promises?
Renters Reform Bill

'Profoundly worrying': Could Tories drop much-needed Renters Reform Bill like its net zero promises?

Here's when people will get the second cost of living payment in 2023
Cost of living

Here's when people will get the second cost of living payment in 2023

Suella Braverman branded ‘shameful’ for saying being gay isn’t enough to qualify for asylum
Asylum seekers

Suella Braverman branded ‘shameful’ for saying being gay isn’t enough to qualify for asylum

How climate catastrophe is affecting geese should be a grave warning for us all
Climate change

How climate catastrophe is affecting geese should be a grave warning for us all

Most Popular

Read All
Renters pay their landlords' buy-to-let mortgages, so they should get a share of the profits
1.

Renters pay their landlords' buy-to-let mortgages, so they should get a share of the profits

Exclusive: Disabled people are 'set up to fail' by the DWP in target-driven disability benefits system, whistleblowers reveal
2.

Exclusive: Disabled people are 'set up to fail' by the DWP in target-driven disability benefits system, whistleblowers reveal

Here's when people will get the second cost of living payment in 2023
3.

Here's when people will get the second cost of living payment in 2023

Citroën Ami: the tiny electric vehicle driving change with The Big Issue
4.

Citroën Ami: the tiny electric vehicle driving change with The Big Issue