The UK is officially in recession - but what does that mean?
Warning bells have been sounding for months over the risk of the economy slipping into recession.
The rule of thumb is that when the economy shrinks for six months in a row, it's in a recession.
But what happens during a recession, and how is it likely to affect you? Here's everything you need to know.
What is a recession?
The most commonly used definition of a recession is at least two consecutive quarters of economic contraction - or "negative growth" - in gross domestic product (GDP).
To break that down, GDP is the total value of goods and services produced over a specific time period. When it goes up, the economy is considered to be doing well.
When it goes down - negative growth or economic contraction - it's not doing well. And when it doesn't do well for six months, it counts as a recession.
The "two quarters" rule is a bit of a blunt tool. The Office for National Statistics doesn't like it because there are other factors that might mean GDP falls for six months that won't mean an economy is in recession.
But it's widely used - including by the Bank of England - as a rule of thumb.
One reassuring thing to remember is that recessions are part of the economic cycle.
What happens during a recession and how would it affect me?
During a recession, there's less money circulating: less money for workers from their employers, less money being spent in shops and restaurants, and less money going to the government in tax from wages to pay for things like benefits and public services.
With employers looking to make savings, people may find it harder to find work or get a pay rise. As businesses and shops close or shrink their workforce, people may lose their jobs.
Getting a mortgage or loan during a recession will prove hard as banks tighten their lending criteria.
It is also likely a recession will not be felt equally across society, with those on benefits, in precarious work or without savings faring worse.
Read more:
Recession remains a threat
'Worst yet to come'
What has happened in previous recessions?
The 2008 financial crisis was the big recession of recent memory, when after 63 quarters of expansion, the UK economy got smaller for five quarters in a row.
Unemployment rose sharply, reaching its highest point since 1995 in 2011, when almost 2.7 million people were out of work.
The economy took five years to get back to the size it was before the recession.
The early 1980s saw a severe recession after inflation hit 18% in 1980 and the early 1990s were characterised by another economic downturn.
The COVID-19 pandemic tipped the UK into its "largest recession on record" in 2020, when GDP slumped by 9.7%. However, the severe recession was followed by a strong recovery.
What's the difference between a recession and a depression?
A depression is significantly worse than a recession: it's longer and more severe and can have global reach.
While a recession is marked by a decline in employment, a depression is characterised by widespread unemployment.
FAQs
Recessions are the result of shocks to aggregate supply or aggregate demand in the economy or both. A supply shock occurs when something reduces the economy's ability to produce output at a given price level.
What is a recession and what happens during a recession? ›
What Happens in a Recession? Economic output, employment, and consumer spending drop in a recession. Interest rates are also likely to decline as central banks—such as the U.S. Federal Reserve Bank—cut rates to support the economy.
What happens when there is an economic downturn? ›
The unemployment rate almost always jumps and inflation falls slightly because overall demand for goods and services is curtailed. Along with the erosion of house and equity values, recessions tend to be associated with turmoil in financial markets.
What was one major cause of the recession? ›
The Great Recession devastated local labor markets and the national economy. Ten years later, Berkeley researchers are finding many of the same red flags blamed for the crisis: banks making subprime loans and trading risky securities.
What does a recession mean for the average person? ›
What happens during a recession and how would it affect me? During a recession, there's less money circulating: less money for workers from their employers, less money being spent in shops and restaurants, and less money going to the government in tax from wages to pay for things like benefits and public services.
What happens to your money in the bank during a recession? ›
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
What happens to house prices during a recession? ›
What happens to house prices in a recession? While the cost of financing a home increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller.
What not to do in a recession? ›
What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
What happens to food prices in a recession? ›
Because people have less money to spend, demand falls, taking the prices of many goods and services with it. Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same.
What causes economic downturns? ›
There are two general types of causes of economic recession: supply shocks and demand shocks. A supply shock occurs when something reduces the economy's ability to produce output at a given price level.
ITR Economics is forecasting that a macroeconomic recession will begin in late 2023 and persist throughout 2024. Business leaders recently had to lead their companies through the recession during the COVID-19 pandemic, and some were even in leadership positions back in 2008, during the Great Recession.
What was the worst financial crisis in history? ›
The Great Depression of 1929–39
Encyclopædia Britannica, Inc. This was the worst financial and economic disaster of the 20th century. Many believe that the Great Depression was triggered by the Wall Street crash of 1929 and later exacerbated by the poor policy decisions of the U.S. government.
Which is worse, inflation or recession? ›
The cost of recessions in terms of wages and employment are more regressive. Inflation, however, is a form of income redistribution in the short run, but does not directly reduce incomes in the aggregate.
Who will a recession hurt the most? ›
A recession is “a significant decline in economic activity spread across the economy, lasting more than a few months.” Industries affected most include retail, restaurants, travel/tourism, leisure/hospitality, service purveyors, real estate, & manufacturing/warehouse.
Do things get cheaper in a recession? ›
Houses tend to get cheaper during a recession due to falling demand. People tend to be wary of making this big purchase during uncertain economic times, so prices fall to entice buyers.
Is it good to have cash during recession? ›
Finance Experts All Say the Same Thing
They all said the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.
Do you lose money in a recession? ›
Recessions can impact your savings in many different ways. Lower interest rates, stock market volatility, and potential job loss can drain your savings.
Who benefits in a recession? ›
Lower prices — A recession often hits after a long period of sky-high consumer prices. At the onset of a recession, these prices suddenly drop, balancing out previous long inflationary costs. As a result, people on fixed incomes can benefit from new, lower prices, including real estate sales.
Do interest rates go up in a recession? ›
Do Interest Rates Rise or Fall in a Recession? Interest rates usually fall during a recession. Historically, the economy typically grows until interest rates are hiked to cool down price inflation and the soaring cost of living. Often, this results in a recession and a return to low interest rates to stimulate growth.
