What does it mean that Britain is in recession?

The UK economy has entered its first recession since the start of the Covid pandemic, dealing a blow to Rishi Sunak's key promise to grow the economy.

Grim new data released by the Office for National Statistics showed the UK's gross domestic product (GDP) contracted by 0.3 per cent in the final three months of 2023, a more serious result than the 0.1 per cent contraction. percent predicted by economists.

Output across all major sectors of the economy fell in the final quarter of 2023, said Liz McKeown, director of economic statistics at the ONS, “with manufacturing, construction and wholesale trade the biggest drag on growth, partly offset due to increases in hotels and vehicle and machinery rentals.”

Excluding the pandemic-hit year 2020, last year marked the weakest year for economic growth since the aftermath of the 2009 financial crisis.

The figures indicate the pressure families are under, with the Bank of England's decision to keep interest rates at a 14-year high meaning the cost of borrowing and mortgages remains high.

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

What is a recession?

A recession is considered a time when the economy is in decline, but there is no globally standardized way to say exactly how much decline and exactly how long the period should last.

In the UK, the most generally accepted definition of a recession is two quarters in a row in which GDP falls.

But this means that even if GDP falls by 0.01 percent one quarter and again by 0.01 percent the next, we are technically in a recession, even though it would be much more painful if GDP contracted by 3 percent a quarter and will increase. 1 percent the next, which technically wouldn't be a recession.

How bad is the current recession?

The drop in British economic output in the final quarter of 2023 was the biggest drop since early 2021, at the height of the pandemic.

But economists have been quick to point out that this is likely a recession in the mildest sense and could prove short-lived, with some insisting it is more accurate to describe the economy as “stagnant,” having made progress. limping close to zero for much of last year.

There are also signs of resilience in other sectors of the economy: the labor market is strong and wages have outpaced inflation for five consecutive months.

However, James Smith, of the Resolution Foundation think tank, warned that Britain's rising population is masking the impacts of the recession, with the economy failing to grow since early 2022 when taking into account growth in the economy. population. “The big picture is that Britain remains a stagnant nation and there is very little sign of a recovery that will lift the economy out of there,” he said.

And Labour's shadow chief secretary to the Treasury, Darren Jones, claimed that looking “under the hood” of the latest data sets suggests Sunak has in fact presided over the longest unbroken record of financial decline for families. since records began in the 1950s.

What does it mean now that we are in recession?

While a severe recession usually causes unemployment to rise, Britain's technical recession serves more as an indicator of the pressure families and businesses are already under, and as a blow to the government's promises to boost economic growth. .

“Today's news that the economy has entered a technical recession is worrying, but it will not be a worry for the millions of people already in unjustifiable hardship,” said Joseph Rowntree Foundation chief economist Alfie Stirling.

“Refrigerators are unlit or empty as already exorbitant food prices continue to rise. Loan and mortgage payments are being defaulted as high interest rates crush household finances. And jobs are increasingly at risk as the labor market continues to deteriorate.

“Just weeks before the budget, addressing this economic security crisis, from individual families to the nation as a whole, must be the first priority for policymakers.”

What does the recession mean for mortgages?

The dismal economic data is likely to increase pressure on the Bank of England to begin cutting interest rates from their 14-year high of 5.25 percent, given the threat to the broader economy posed by the painfully high borrowing costs.

But even as homeowners eagerly eye any cut in the Bank's base rate, they have been forced to pay thousands more on their mortgages as rates have soared from just 0.1 percent in 2020, analysts are not sure if this will happen before the summer.

Inflation remains double the Bank's 2 percent target, meaning the central bank will want to make sure it falls further before lowering rates.

ING experts do not predict a cut until August, while others believe it could come in May or June.

When has the UK been in recession before?

The UK's most recent recession came in 2020, when coronavirus lockdowns dealt a huge blow to GDP, causing the deepest recession since 1709, although it was actually self-imposed and short-lived. However, the disruption of global supply chains helped trigger the cost-of-living inflation crisis.

Before that was the 2008 financial crisis, which saw UK economic output stagnate for five consecutive quarters in the deepest recession in decades, sparked by fears that mortgages were going to people who couldn't afford them, which It froze credit markets and saw major banks collapse.

In modern history, the United Kingdom has also experienced recessions in the early 1990s (famous for the Black Wednesday fall in the value of the pound) and at least one in each of the previous four decades.