Forecasts from firms, such as Hargreaves Lansdown, are predicting an economic downturn of at least 12-months for the UK. Households are already experiencing a sharp rise in their energy bills and inflation-hiked prices on goods and services. However, the unique financial pressures of the last year look set to continue as experts consider the likelihood of a recession more than likely.
What is a recession?
A country is considered to have fallen into recession if it experiences two consecutive three-month periods in which output shrinks instead of grows.
This is measured by gross domestic product, or GDP, with a decrease in overall value of goods and services being a clear sign of economic decline.
Last month, the Office for Budget Responsibility (OBR) warned Britain’s economy will shrink by around two percent and will not reach its pre-pandemic level until the end of 2024.
Earlier this week, data from Calastone revealed that investors have pulled more than £1billion from the UK market due to recession concerns.
While most European funds saw similar actions from investors, Britain was found to be hardest hit with the second-worst outflow on record.
Financial analysts are anxiously waiting to see what further action the Bank of England will take in light of this issue, especially considering interests are likely to be raised on December 14, 2022.
Ahead of next week’s base rate decision, Hargreaves Lansdown offered an explainer on the state of the UK’s economy and outlined why the country is currently “heading” into a 12-month recession.
The firm stated: “We already know that the economy shrank during the three months to the end of September. If it shrinks again in this current quarter, then that would mark an official recession.
“The early indications are that it’s heading that way, and the latest forecast from the independent spending watchdog – the Office for Budget Responsibility – is that the recession will last a year.
“This is likely to lead to an increase in unemployment and is set to dent the profits of some companies will be affected, which in turn will mean the government won’t be able to collect so much in tax to pay for public services.
“But it is hoped that lower demand for goods and services should help bring down inflation.”
Prior to this recession threat, Britons have already been dealing with the existing rise in the cost of living which is being attributed to a skyrocketing inflation rate.
The most recent Consumer Price Index (CPI) rate of inflation reached a 41-year high of 11.1 percent with the price of goods and services going up as a result.
To bring said prices down, the Bank of England’s Monetary Policy Committee (MPC) has hiked the country’s base rate over consecutive months in a bid to mitigate the impact of inflation.
With this increase, interest rates have also gone up which is one of the contributing factors in pushing Britain into a recession.
As it stands, the central bank has raised the UK’s base rate to three percent and this is expected to rise even further next week once the MPC meets once again.
Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown, noted that even with the looming recession, the Bank of England still considers inflation a graver threat which needs to be addressed.
Ms Streeter explained: “The last time it was above three percent was 14 years ago, as the effects of the financial crisis were taking hold and the Bank was in the process of rapidly reducing rates to help keep the costs of borrowing down and help companies and consumers.
“This time, even though the UK is heading into recession, the Bank is still set to ratchet rates up further because inflation is seen as a greater threat to the economy.
“The base rate is set to rise to an expected peak of between 4.5 percent to 4.75 percent by the middle of next year.’’