What is the significance of Britain being in a recession?

The British economy has officially entered a state of recession due to the impact of the Covid pandemic, which is a setback for Rishi Sunak’s promise to boost economic growth.

The Office for National Statistics released somber new statistics revealing that the UK’s gross domestic product (GDP) decreased by 0.3% in the last quarter of 2023. This was a larger decline than the 0.1% decrease predicted by economists.

According to Liz McKeown, director of economic statistics at ONS, the last quarter of 2023 saw a decline in output for all major sectors of the economy. The largest contributors to this decline were manufacturing, construction, and wholesale, although there were some gains in the hotel and vehicle/machinery rental industries that helped to offset the overall decrease.

Except for 2020, which was greatly impacted by the pandemic, the previous year showed the lowest economic growth since the aftermath of the financial crisis in 2009.

The numbers show the financial strain on households, as the Bank of England has chosen to maintain high interest rates for the past 14 years, resulting in expensive borrowing and mortgages.

While chancellor Jeremy Hunt insisted the government must “stick to the plan” to cut inflation despite tough times for families, his Labour counterpart Rachel Reeves warned Mr Sunak “can no longer credibly claim that his plan is working” with his promise to grow the economy “now in tatters”.

A recession is characterized by a decrease in the economy, but there is no universally agreed upon method for quantifying the extent and duration of this decline.

In the United Kingdom, a commonly accepted measure of a recession is when the GDP decreases for two consecutive quarters.

This indicates that a decrease of 0.01% in GDP for two consecutive quarters would technically classify as a recession, even though it would be less severe than a 3% decrease followed by a 1% increase which would not be considered a recession.

The decline in Britain’s economic performance during the last quarter of 2023 was the most significant decrease since the beginning of 2021, during the peak of the pandemic.

However, economists have promptly stated that it is probable for this to be a mild recession and could potentially be temporary. Some argue that it would be more precise to characterize the economy as “stagnant” due to its sluggish growth near zero throughout the majority of last year.

Other areas of the economy are also showing signs of strength, as indicated by the strong job market and wages consistently surpassing inflation for the past five months.

Unfortunately, according to James Smith from the Resolution Foundation think-tank, the increasing population in Britain is masking the effects of the recession. Despite being in early 2022, the economy has not shown any growth when factoring in the population growth. Smith stated, “The overall situation is that Britain is still a stagnant country and there are minimal indications of a rebound that will pull the economy out of this state.”

The Labour Party’s shadow chief secretary to the Treasury, Darren Jones, stated that upon closer examination of recent data, it appears that Mr. Sunak has overseen the longest period of financial decline for families since records started in the 1950s.

Although a deep economic downturn typically results in an increase in unemployment, the technical recession in Britain serves more as a sign of the strain that households and businesses are currently facing. It also undermines the government’s pledges to stimulate economic expansion.

Alfie Stirling, chief economist at the Joseph Rowntree Foundation, stated that the recent announcement of the economy entering a technical recession is worrisome. However, for the millions who are already facing unjustifiable hardships, this may not be their primary concern.

Revised: Due to soaring food prices, refrigerators are either turned off or have little to no food in them. Families are struggling to make loan and mortgage payments due to high interest rates, and job security is declining as the labor market worsens.

“In the weeks leading up to the Budget, the main focus for policymakers should be addressing the economic security crisis that affects both individual families and the nation as a whole.”

The dismal financial statistics are expected to increase the urgency for the Bank of England to lower interest rates from their 14-year peak of 5.25 percent. This is due to the potential harm to the overall economy caused by steep borrowing expenses.

However, even though homeowners are eagerly anticipating a decrease in the Bank’s base rate, which has caused them to pay significantly more for their mortgages with rates rising from 0.1 per cent in 2020, analysts are unsure if this will happen before the summer.

The inflation rate remains twice the targeted 2 percent set by the Bank, therefore the central bank will aim to decrease it further before lowering interest rates.

Experts at ING do not anticipate a decrease until August, but some believe it may occur in either May or June.

In 2020, the United Kingdom experienced a recession due to the impact of Covid lockdowns on its GDP. This was the most severe recession since 1709, but it was self-imposed and short-lived. The disruption to global supply chains also played a role in the rise of inflation and cost of living crisis.

Before that, there was the 2008 financial crisis. It caused the UK’s economy to remain stagnant for five consecutive quarters, resulting in the worst recession in decades. This was caused by concerns about mortgages being given to individuals who could not afford them, causing credit markets to freeze and leading to the collapse of major banks.

In recent times, the United Kingdom has also experienced economic downturns in the early 1990s, including the infamous “Black Wednesday” when the value of the pound plummeted, as well as at least one recession in each of the four decades before that.

Source: independent.co.uk