The chances of a recession in the UK have increased after new figures found the economy unexpectedly shrank by 0.3% in April.
Economists had expected the Office for National Statistics (ONS) to confirm a slight rise in gross domestic product (GDP) of 0.1% in April, but official data showed a contraction of 0.3% for the month.
It comes just days after what City A.M. described as a “bleak warning” from the Organisation for Economic Co-operation and Development (OECD), which said in 2023 only Russia would register weaker growth than the UK in the G20.
What caused the April contraction?
While the ONS said that each main area of the economy contributed to April’s decline – with soaring energy costs and supply chain disruption dragging down manufacturing amid the cost-of-living crisis – the depth of the contraction was down to an anomaly, said Sky News.
“A big drop in the health sector due to the winding down of the test and trace scheme pushed the UK economy into negative territory in April,” ONS director of economic statistics, Darren Morgan, explained.
Nevertheless, the latest snapshot showed the three main sectors of the British economy – the service sector, industrial production and construction – all shrank for the first time since January 2021 during the nationwide Covid lockdown.
It came as the energy price cap jumped 54% and Chancellor Rishi Sunak ramped up National Insurance payments, piling more pressure on household budgets as the cost-of-living crisis deepens.
“The lacklustre economic data fuelled fears Britain could be headed for a recession and clouded the outlook for the Bank of England,” said The Telegraph, which added that the Bank’s Monetary Policy Committee is expected to raise interest rates to 1.25% at its meeting this week.
What could tip the economy into full recession?
“Multiple factors in play have contributed to the current financial crisis facing the UK,” said Unbiased. “In isolation, they are big challenges but not a disaster. However, a combination of the successive lockdowns in the UK slowing down the economy, along with Russia’s invasion of Ukraine damaging the international market price of gas and oil, mean that the current volatile climate could be set to take another downward turn.”
“The data chimes with widespread warnings that the economy faces a prolonged period of low growth, caused by a cost of living crisis that is only forecast to intensify in the months ahead as energy bills rise to stoke inflation further,” reported Sky News.
City A.M. said: “Firms have retrenched in response to Russia’s invasion of Ukraine, high inflation and ongoing supply chain disruption souring the trading environment, dampening the UK’s growth prospects.”
Consumers are rapidly reducing their spending in the face of a “once in a generation” cost-of-living squeeze, George Lagarias, chief economist at accountancy firm Mazars, told The Guardian.
“For an economy where consumption is so central, the signs going forward are disconcerting. Technically, we may not yet be in a recession, but for many consumers it certainly feels like one.”
What would a recession mean for the country?
A recession is defined as two successive quarters of decline in gross domestic product (GDP). While that may sound abstract it has real-life consequences on everything from job prospects and housing to investments.
“Businesses are likely to try and save money during a recession, meaning jobs could be lost, and with spiralling inflation and energy price hikes, wages may be unable to cover the cost of everyday essentials,” said Unbiased.
The global financial crisis of 2008 resulted in UK unemployment levels reaching 10%. However, “no one can predict the severity or the length of [a recession], making it difficult to outline the tangible impact on UK workers”, said the financial advice site.
Forbes reported that with more people unable to pay their bills during a recession, “lenders tighten standards for mortgages, car loans and other types of financing”. This means you may need a better credit score or a larger down payment to qualify for a loan than would be the case during more normal economic times.
Investments in assets such as stocks, bonds and property can lose value in a recession, cutting income and savings, and denting retirement funds too, it added.
As well as the effect on lower-skilled and lower-paid workers, recessions “also impact young people disproportionately, as we saw from the recession in 2008”, said HuffPost UK.
Are there any positives?
“There are arguments that recessions are part and parcel of the economic cycle,” said the i news site. “They can lead to a clearing out, or what some economists call a reset or ‘correction’.”
This can have knock-on positive effects for some people or sectors. High inflation, for example, such as that seen in the early 1980s, usually leads to higher interest rates, which is good for people with savings.
The recession of the early 1990s, meanwhile, led to lower house prices and interest rates, allowing Generation X and younger Babyboomers to get on the property ladder.