Why is the UK in recession?

The UK is in recession for the first time in 11 years.

So what exactly does that mean?

What is a recession?

In normal times, a country’s economy grows.

Its citizens, on average, become slightly richer as the value of the goods and services it produces – its Gross Domestic Product (GDP) – increases.

But sometimes the value of goods and services produced falls.

A recession is usually defined as when this happens for two three-month periods – or quarters – in a row.

This has now happened in the UK for the first time since 2009.

If a recession carries on for a long time, or is particularly bad, it is known as a depression.

Why does it matter if there is a recession?

For most people, economic growth is a good thing.

It usually means there are more jobs, and companies are more profitable and can pay employees and shareholders more.

A growing economy also means the government receives more money in taxes. So it can cut taxes, or spend more on benefits, public services and government workers’ wages.

When the economy shrinks, all these things go into reverse.

What pushed the UK into recession?

Official figures on 12 August confirmed that the UK had entered a recession for the first time in 11 years.

UK GDP fell by 2.2% in the first quarter of 2020 (January to March), as the economy began to feel the effects of lockdown.

Figures for the second quarter (April to June) showed the steepest fall on record, of 20.4%, as the lockdown brought many areas of the economy to a complete standstill.

Those two quarters in a row of falling GDP confirm that the UK is in a recession.

The International Monetary Fund (IMF) predicts huge falls in GDP for 2020 as a whole – an extraordinary fall of 8.0% for the US and 10.2% for the UK.

It estimates the entire world economy will shrink by 4.9% this year, making it the worst recession since the 1930s’ Great Depression.

How could a recession affect me?

Some people may lose their jobs, or find it harder to get promotions, or a pay rise.

Graduates and school leavers could find it harder to get a first job.

The Bank of England said the UK economic slump will be less severe than expected, but recovery will take longer.

It expects the economy to shrink 9.5% this year, compared with an earlier estimate of 14%.

However, the pain of a recession is typically not felt equally across society, and inequality can increase.

For instance, many UK homeowners who kept their jobs during the last recession did OK. Mortgage interest payments for many fell considerably, leaving them with more spending money.

Others, such as benefit recipients or public sector workers, did less well.

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How long was the last recession?

In the UK the last recession, caused by the global financial crisis, lasted five quarters – from the second quarter of 2008 onwards.

GDP fell by an estimated 7.2% over the whole period.

Unemployment rose sharply, but began to fall back again two years later.

And there was a massive deficit – the gap between what the government raises in taxes and what it spends on public services.

This resulted in a near-doubling of the national debt, and a decade-long programme of austerity. There were steep cuts in many areas of government spending, except health, education and international aid.

When will the recession end?

The Bank of England predicts the UK economy will grow in the third quarter of 2020, so according to the official definition the recession may already be over.

However, some of the worst effects of the recession, particularly unemployment, are only beginning to appear.

The IMF predicts that the world economy will grow next year, too. However no-one knows how strong the recovery will be.

If all the businesses which shut during the pandemic reopen quickly, the consequences would be less severe.

However, there are fears over future spread of the virus, and people may not want to travel or go out, so the consequences will be felt for many years.

What can be done?

The discovery of a vaccine would help create a strong recovery, but until then, there are a few remedies available.

In the last recession, central banks cut interest rates, so people and businesses could borrow more easily, and had more to spend.

But interest rates are already close to zero in many places, and a further cut may not be possible.

Governments around the world are already borrowing huge sums to support their economies, but that borrowing comes at a cost.

  • Recession
  • Coronavirus lockdown measures
  • Coronavirus pandemic
  • GDP
  • Economics

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