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What Is A Recession?

What Is A Recession?

After the Bank Of England announced an increase in interest rates, the UK looks set for a new recession by Christmas

The Bank of England has raised interest rates again, going up from 1.25 percent to 1.7 percent. This means the UK will enter five consecutive quarters of recession.

This change means interest is now at the highest level since January 2009, and it's the biggest rise in UK rates since 1995.

What exactly is a recession and what does it mean for the UK?

The official technical definition of a recession is what happens when an economy contracts over two consecutive quarters (two x three month periods) of six months, and sees a reduction in activity. When an economy does this, it is said to have entered a recession. The UK is predicted to go into a recession by Christmas that will last for more than a year.

Forecasts predict that the GDP (Gross Domestic Product) will remain at a reduced level for all of 2023. The GDP looks at how much the nation is buying and producing, and it has been hit by the rising cost of living and many people reducing their spending.

A recession is also linked to stock markets declining, stagnant or crashing wages, and a rise in unemployment figures. There is no set time for how long a recession can last, meaning it can be weeks, months, or years. This new recession is predicted to last for 15 months, however the knock-on effects can be felt for much longer.

If a recession lasts for around three years or more, it turns into a Depression. It can also be a Depression if the GDP declines by 10% or more.

The news of a forthcoming recession comes after the Office Of National Statistics (ONS) confirmed that GDP fell by 0.3%.

Prices have been rising for some time, with the Bank of England noting in June that prices had risen by 9.4 percent compared to a year ago, adding this was 'well above' its target.

"Higher energy prices are one of the main reasons for this," it explained.

"Russia’s invasion of Ukraine has led to more increases in the price of gas. Since May, the price of gas has more than doubled. We think those price rises will push inflation even higher over the next few months, to around 13 percent.

"There is also pressure on prices from developments in the United Kingdom. Businesses are charging more for their products because of the higher costs they face. There are more job vacancies than there are people to fill them, as fewer people are seeking work following the pandemic. That means that employers are having to offer higher wages to attract job applicants. Prices for services have risen markedly.

"The squeeze on households’ incomes due to the rise in energy prices has led to slower growth in the UK economy. We expect the size of the UK economy to fall over the next year."

They also confirmed that inflation will keep rising this year, before beginning to fall again next year.

The last recession in the UK was in August 2020 at the height of the Covid pandemic, when GDP fell by an enormous 20.4%. Before that, the last recession was in 2009 following the 2008's economic crisis, where GDP fell by 7.2%.

Featured Image Credit: Alamy

Topics: Money, UK News, Politics