What is a recession and how could it affect me?

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The UK is in recession, and will remain in one for the whole of 2023, warns the independent Office of Budget Responsibility.

What is a recession?

In normal times, a country’s economy grows.

But sometimes the level of GDP falls, and that’s a sign that the economy is doing badly.

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 ONS says the economy contracted by 0.3% between August and October.

It said that while the economy grew by 0.5% in October, economic output in September was affected by the extra bank holiday for the Queen’s funeral.

If the next quarter also shows a fall, the UK will be in recession.

It thinks the recession will cause an overall drop of 2% in GDP.

The OBR predicts that the economy will grow only weakly in 2024 (by 1.3%) and 2025 (by 2.6%).

As a result, it says the UK’s unemployment rate is likely to rise from its current level to 4.9% in 2024.

The Bank of England previously warned that the UK was facing a two-year recession – which would be the longest on record.

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.

That means it can spend more on benefits, public services and government workers’ wages, or it can cut taxes.

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

What is happening around the world?

Other economies are also struggling, according to the International Monetary Fund (IMF).

However, the UK is bottom of the G7 group of leading industrial nations for economic growth.

Globally, the IMF says economic activity is slowing down more quickly than expected, and that inflation rates are higher than they have been for several decades.

This is partly blamed on Russia’s war in Ukraine, which has increased energy prices and food prices.

There are also continuing effects from the Covid pandemic.

How could 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.

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 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.

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