The UK economy could enter recession later this year, according to a projection from the Bank of England. But with the nation already feeling the pinch, what difference will it actually make to your money?
The Bank of England shared its grim outlook for the UK economy shortly after announcing the sixth consecutive base rate rise, to 1.75%. It predicted that the UK will enter recession by the end of 2022, thanks to slowing gross domestic product (GDP) growth.
With the cost of living crisis underway, households across the country are already tightening their budgets. So will a recession make it even harder to pay your bills?
Here, Which? explores what a recession really is, and whether this next predicted one can be avoided.
What is a recession?
A recession is two quarters (six months in total) of negative GDP growth. We last saw this happen at the start of the pandemic, when the UK experienced a six-month recession during the first half of 2020.
However, this recession was relatively short-lived compared to the Great Recession of 2008-09, which lasted more than a year. The Bank of England says the upcoming recession could last well into 2023, potentially making it just as long.
GDP is used to measure a country’s economic success. It’s based on factors such as how much people are spending and the value of a country’s exports.
At the moment, GDP is still growing. But that growth is slowing because prices are rising faster than incomes, which means people aren’t spending as much as they once were. The Bank projects that this will lead to negative growth by the end of the year.
As you can see in the graph below, GDP has been slowing for some time. It grew by just 0.8% in the first quarter of 2022 - down from 1.3% the quarter before, 0.9% before that, and a relatively huge 5.6% before that.
Quarter-on-quarter GDP growth (%)
Source: Office for National Statistics (ONS)
- Find out more: cost of living advice and tips
What could a recession mean for you?
Job losses
The Bank forecasts unemployment rising every year until 2025, which would involve many people losing their jobs.
The unemployment rate has been shrinking since the end of 2020, according to the ONS. But it saw a slight increase in the three months to February this year, and has been consistently at 3.8% since then. Unemployment peaked at 10% during the 2008-09 recession.
Lower wages
Rising costs will see businesses and consumers trying to save money. For employers, this could mean forgoing pay rises, leaving workers with lower real-terms paycheques to cover spiralling energy bills and inflated grocery prices.
Credit crunch
The 2008-09 recession famously led to a ‘credit crunch’, which saw people struggling to find options for borrowing.
While there was a slight increase in unsecured credit in the three months to the end of May, lenders expect availability to decrease in the following three months to the end of August, according to the Bank of England’s latest Credit Conditions survey.
- Find out more: best credit card deals
Will your money be safe in your bank?
The 2008-09 recession gave us infamous images of long queues outside cash machines, as customers rushed to withdraw their money from struggling banks.
There’s no need to run to the cashpoint, however. The Financial Services Compensation Scheme (FSCS) will protect up to £85,000 of your money, per institution. So if your bank does collapse, you’ll be able to recover this amount.
- Find out more: The FSCS explained
Can we avoid a recession?
The Bank of England’s projections are based on there being no change in government policy. With a new prime minister set to take office in September, some kind of new policy intervention is highly likely. This means we might not see a recession after all, but it won’t be easy for the government to avoid.
Conservative leadership candidates Rishi Sunak and Liz Truss will no doubt seek to establish themselves with new economic policy, possibly quite early in their tenure. Frontrunner Truss has already said she believes recession isn’t inevitable, although her tax cuts-based approach has drawn criticism from rival Sunak.
Ultimately, we’ll have to wait and see what the next prime minister has in store, and what that means for the Bank of England’s next projections.
- Find out more: cost of living money-saving tips
source https://www.which.co.uk/news/article/what-would-a-recession-mean-for-your-money-aRril9c11zDK