Is the UK heading into a recession and what would that mean for my money? Explained

The Bank of England yesterday issued a strong warning to the British public that the economy is at risk of slipping into recession after raising interest rates to 1%.

The Bank of England sounded recession alarms on Thursday as it hiked interest rates to curb inflation amid a widening cost-of-living crisis.

Interest rates rose to 1% amid warnings that the economy was about to reverse and that inflation was set to peak at more than 10% – the highest level in 40 years – as the war in Ukraine created a crippling cost-of-living crisis aggravated.

In a dismal series of forecasts, the bank predicted growth will slow in the final three months of 2022 as cost pressures force households to rein in spending. Inflation was 7% in March. April figures, which are forecast at 8%, are yet to be released.

The forecast for 2022 growth remains unchanged at 3.75%, but the bank lowered its 2024 growth forecast to 0.25% from 1% it had forecast in February.

That means the UK will narrowly miss a technical recession, defined as falling two-quarters of consecutive gross domestic product (GDP).

Recessions can occur for a variety of reasons and are typically associated with rising unemployment and falling household spending – in this case, the skyrocketing cost of living.

However, Deputy Governor Ben Broadbent said that while the UK economy is facing a bigger shock than during the oil and energy crisis of the 1970s, it will not last as long.

He forecasts the economy to stagnate in the second quarter before collapsing nearly 1% in the last three months of 2022.

And while the unemployment rate will continue to fall to as high as 3.6%, it will climb back up to 5.5% within three years, according to the bank.

Governor Andrew Bailey said: “I recognize the hardship this will cause for many people in the UK, particularly those on the lowest incomes, often with little or no savings, those most affected by price hikes on basic necessities such as food and energy are .”

He added that further rate hikes will likely be needed “in the coming months” to cool rampant inflation, but acknowledged that the short-term impact of rising costs on finances “is something that monetary policy cannot prevent”.

The report is painful to read as household income is under severe pressure ahead of a projected 40% hike in the energy price cap in October.

The second increase in a year, after bills rose 54 per cent in April, would bring the average household’s annual electricity bill down to around £2,800.

What is a recession?

A recession is essentially a time of economic decline.

A country’s wealth is measured by its gross domestic product (GDP). This is the value of all goods and services produced in this country.

In normal times, a country’s GDP will gradually increase, making its citizens richer (on average).

But sometimes GDP falls, which means the economy shrinks.

If this occurs in two consecutive quarters (i.e. two three-month periods), it is called a recession.

When was the last recession?

Coronavirus lockdown measures plunged Britain into recession last year.

The economy suffered its biggest slump on record between April and June, falling 20.4% compared to the first quarter of the year.

As shops, hotels, restaurants, pubs and schools closed, household spending fell.

The last recession before that was probably the most notable – 11 years ago, in 2008.

It was a global financial downturn triggered by the US subprime mortgage crisis.

UK GDP has fallen for five straight quarters – 15 months in total.

It took seven years for the unemployment rate to return to pre-crash levels.

What would a recession mean for me?

When a country’s economy shrinks, it means companies are less profitable. This usually means unemployment goes up and wages go down.

People will make less money and spend less money, which can mean businesses go bust.

The government will also receive less tax, meaning it may cut key public services, benefits and wages for government employees.

At the same time, government spending will increase as job losses mean more people take advantage of welfare benefits.