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What is a recession? UK output falls and interest rates go up

·3-min read
The Bank of England has raised interest rates again to help cool rocketing inflation (PA Archive)
The Bank of England has raised interest rates again to help cool rocketing inflation (PA Archive)

The Bank of England has said it expects a 0.1% fall in GDP over the current quarter, indicating that the UK is in a recession.

On Thursday it raised interest rates by 0.5 percentage points to 2.25 per cent having raised them by the same amount on August 3 in an attempt to curb soaring prices. Interest rates are now at the highest level since November 2008.

The Bank blamed the decline in output in part on rising gas prices following Russia’s invasion of Ukraine.

The decision to hike rates is an effort by the Bank to tackle inflation – or rising prices – which are having a recessionary effect on the UK economy by reducing demand.

But what is a recession, and what have experts forecasted for the UK this year?

What is a recession?

A recession is defined as two successive quarters of decline in GDP.

GDP is the common measurement of the size of a country’s economy. In the UK it is measured in sterling and is a calculation of the value of goods and services produced over a period of time.

But the measurement most people focus on is the percentage change – the growth of the country’s economy over a period of time, typically a quarter (three months) or a year. It’s been used since the 1940s.

A recession happens when the GDP figures turn negative and the economy goes into decline.

If a recession carries on for a long time, or is particularly bad, it is known as a depression.

Why are we in a recession?

The UK is now in a recession due to higher energy prices, the conflict in Ukraine, Brexit, and the inflationary effect of industries reopening after Covid lockdowns.

Inflation was at 9.9% in August and is expected to rise further.

The minutes of the Bank’s rate-setting committee also contained news that inflation would not be rising by as much as initially expected in October.

The May Monetary Policy Report said: “Household disposable income is projected to fall in 2022 by the second largest amount since records began in 1964.”

It is expected that the economy will shrink by 0.25% while unemployment will probably reach 5.5% in the next few years.

Economists have warned MPs that the UK will have to go through at least a “mild recession” before inflation becomes more manageable.

London School of Economics professor Charles Goodhart said that wages and prices were feeding off each other to push up inflation, and this could not be weakened without the labour market weakening.

The National Institute of Economic and Social Research estimated in May that about 1.5 million households will struggle to pay for food and energy bills during the cost of living crisis. Its report predicted the Bank of England will have to raise interest rates to 2.5% next year to try to curb soaring inflation.

When was the last recession?

The UK entered a recession in 2020 due to Covid lockdowns.

The economy plunged by 20% between April and June in 2020, as businesses closed and people were ordered to stay at home. GDP had fallen by 2.2% between January and March that year.

At the time, the ONS said: “This is the largest quarterly contraction in the UK economy since ONS quarterly records began in 1955, and reflects the ongoing public health restrictions and forms of voluntary social distancing that have been put in place in response to the coronavirus pandemic.”