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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 economy shrank in the three months to September, meaning the UK could well be headed into a recession.

Figures published by the Office for National Statistics (ONS) showed that the economy contracted by 0.2 per cent between July and September. If it shrinks again between October and December, the UK will officially be in recession, defined as when an economy shrinks for two consecutive three-month periods.

The Bank of England previously warned that the UK faces its longest ever recession, as it raised interest rates by the highest amount in 33 years to combat inflation.

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 is already in a recession and figures from the ONS confirmed it.

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The Bank blamed the problems on rising prices across the year, especially for energy and food, meaning people had less money so were putting less back into the economy through spending. Inflation hit 10 per cent in September, meaning average prices were 10 per cent higher than they were at the same time last 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, less spending, fewer products sold. All the hallmarks of a shrinking economy.

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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.

Unemployment often goes up as businesses struggle to manage their costs and stay open. They may also raise prices in an effort to make more money but when prices are high, demand often goes down. Things cost more so people can afford fewer of them and the cycle of inflation can deepen.

Unemployment currently sits at 3.6 per cent. But as the economic situation worsens, this is expected to shoot up. The Bank of England forecast it will rise to 6.5 per cent.

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.”

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.

The Bank of England raised interest rates by the highest amount in more than 30 years in an attempt to slow borrowing and bring inflation down. The Bank said inflation would remain at over 10 per cent in the “near term”, but begin to “fall sharply” from mid-2023 as interest rates rise. Inflation could fall to below two per cent in the following years.

But bear in mind inflation falling does not mean prices fall – they’re still going up, but just by slightly less.

The government will announce its policies to combat the recession on November 17. Some of the details have already been leaked to the press, or at least tested for their reaction, and Chancellor jeremy Hunt is widely expected to cut government spending in some areas and increase taxes in others.

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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.

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