The economy shrank by 0.3% in August, reinforcing predictions that the UK will enter a recession this year.
Prices are rising at the fastest rate in 40 years, eroding people’s budgets and outpacing wage growth. The UK is expected to enter a recession next year as a result of this.
While you cannot prevent a recession, there are steps you can take to protect yourself financially.
This article discusses:
- What exactly is a recession?
- Is the UK entering a recession?
- What could cause the UK to enter a recession?
- What are the symptoms of a recession?
- What impact would a recession have on me?
What exactly is GDP?
GDP is an abbreviation for gross domestic product. It is used to calculate the size of the economy. When GDP rises, it can sometimes indicate that businesses are thriving and the economy is expanding.
The Office for National Statistics collects data from thousands of businesses across the UK to calculate GDP.
There are three ways to measure the economy, which can be provoking:
- The total value of produced goods and services
- Everyone’s earnings from the production of goods and services
- The total amount of money spent on goods and services (minus the value of imports, plus exports)
These are the GDP output, income, and expenditure measures.
In theory, all three of these different measures should yield the same result.
Is the UK entering a recession?
According to the most recent official figures, the economy contracted by 0.3% in August.
This year’s GDP figures have been volatile:
- In July, it increased by 0.2%.
- In June, it fell by 0.6%.
- Many economists expected growth to be flat in May, so the 0.5% increase surprised them.
- The economy shrank by 0.3% in April.
- It also shrank by 0.1% in March.
- When the economy contracts, as it did in August, it’s a sign that we’re on the verge of a recession.
According to the most recent August data, the economy is expected to contract in the third quarter (between July and September). To avoid a drop in that quarter, there would need to be more than 1% growth in September.
The Bank of England forecasts that the economy will contract in the final three months of this year and will continue to contract until the end of 2023.
According to the National Institute of Economic and Social Research (NIESR), the UK could enter a recession in the second half of this year due to the cost of living crisis.
According to the NIESR, GDP will fall by:
- Between July and September, 0.2%
- 0.4% from October to December
Meanwhile, the multilateral Organization for Economic Cooperation and Development (OECD) predicts that global growth will slow to 3.6% in 2022 before falling to zero in 2023.
If these figures are correct, the UK will be the slowest growing of the G7 group of leading industrial nations.
What could trigger a recession in the United Kingdom?
The rising cost of living forces people to spend more money on household bills, leaving them with less disposable income (or none at all).
The most important factor is the cost of gas and electricity. People are also facing higher food, fuel, and borrowing costs.
The situation is expected to worsen throughout the year, with inflation currently at 9.9% and expected to rise further this autumn. As a result, people are reducing their spending on goods and services, including necessities.
As people tighten their belts, less money flows into businesses. Consumer spending accounts for two-thirds of UK GDP, so when it falls, the economy contracts.
We were last in a recession in 2020, when the UK economy was reeling from the effects of the Covid lockdowns. It contracted by 10% year on year, marking the UK’s worst economic performance in 300 years. However, the effects of the recession that followed the 2008 financial crash had a longer-term impact: it took five years for the UK economy to recover to its pre-recession size.
What are the symptoms of a recession?
There are several warning signs that a recession is on the way.Five of them are listed below.
- Stock market trembles
Economic factors can cause the stock market to react. For example, when GDP figures revealed a 0.3% drop in the economy in April, the stock market plummeted.
Share price declines can indicate a loss of investor confidence in the future earnings potential of the companies in which they have invested. They see people spending less money on the companies’ products or services and decide to sell their stock.
This type of market judgement could indicate that we are on the verge of a recession. It can also be a self-fulfilling prophecy, as falling share prices have a negative impact on consumer and investor confidence.
If there is widespread stock selling, it could be a sign that people are feeling the pinch and want to cash in their investment profits to supplement their income.
- The unemployment rate has risen.
According to the Office for National Statistics, the UK unemployment rate was 3.6% from May to July of this year. This is the lowest rate of unemployment since 1974.
When the recession ended in 2009, the unemployment rate reached 9.5% before peaking at 10% in the following months. We’re still a long way from there.
However, it is one to watch because higher unemployment could indicate that businesses are struggling, causing people to lose their jobs.
- Job openings decrease
As businesses stop hiring, the number of job openings may decrease. When there is so much uncertainty about the future, businesses lose confidence and stop expanding.
The number of job vacancies reached 1.26 million in the three months to August, a 34,000 decrease from the previous three months.
Despite the fall, it doesn’t appear that there is much to be concerned about on this front just yet.
From March to May 2022, the number of job openings reached a new high of 1.3 million. This is an increase of 503,900 from the pre-pandemic level in January to March 2020.
- Companies report losses
Another possible indicator of a recession is an increase in the number of companies reporting losses rather than profits, indicating dwindling demand.
Businesses that sell luxury goods and services, such as new cars, may be among the first to struggle.
While the health of a single company does not reveal the entire picture, if many businesses are losing money, it is likely that this will have an impact on employment and wages. This, in turn, would have a negative impact on the economy.
- Earnings growth falls short of inflation.
If average earnings fail to keep pace with inflation, it means that the money in our pockets is shrinking in real terms.
According to the most recent estimates, average regular pay (excluding bonuses) increased by 5.4% between June and August. During that three-month period, inflation ranged between 9.4% and 10.1%.
This means that workers’ pay is actually decreasing by more than 4%.
What impact would a recession have on me?
The problems caused by a recession can seep into our daily lives and last for years, even after the economy begins to recover.
There are several ways it could impact your life:
• You may find it more difficult to obtain a promotion or a raise.
• Worse, you or someone you know may lose your job as businesses try to save money.
• It may be more difficult to find a new job as vacancies disappear.
• If you own a business, you may have to let go of co-workers as you reduce your workforce.
• Your company may fail.
• You could go bankrupt.
• Shops you used to frequent may close.
• A recession will not affect everyone in the same way. In fact, an economic downturn can exacerbate social inequality by widening the gap between rich and poor.
People who have savings and a more stable (or diverse) income will fare better than those who do not.