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
A recession is a trend of simultaneously slowing business and consumer activity, leading to negative growth as measured by gross domestic product (GDP) and other data series, such as the unemployment rate, wage growth, and the like.
What is an economic recession and what causes it? ›
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 exactly happens in a recession? ›
A recession is a meaningful and extensive downturn in economic activity. A common definition holds that two consecutive quarters of decline in gross domestic product (GDP) constitute a recession. In general, recessions bring decreased economic output, lower consumer demand, and higher unemployment.
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 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.
Do things get cheaper in a recession? ›
While the prices of individual items may behave unpredictably due to unexpected economic factors, it is true that a recession might cause the prices of some items to fall. Because a recession means people usually have less disposable income, the demand for many items decreases, causing them to get cheaper.
What happens if we go into a recession? ›
This usually results in job losses and an increase in the unemployment rate. While there is no single definition of recession, it is generally agreed that a recession occurs when there is a period of reduced output and a significant increase in the unemployment rate.
What is the real cause of recession? ›
As energy becomes expensive, it pushes up the overall price level, leading to a decline in aggregate demand. A recession can also be triggered by a country's decision to reduce inflation by employing contractionary monetary or fiscal policies.
What not to buy during a recession? ›
During an economic downturn, it's crucial to control your spending. Try to avoid taking on new debt you don't need, like a house or car. Look critically at smaller expenses, too — there's no reason to keep paying for things you don't use.
Do house prices go down in 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.
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.
Who will a recession hurt the most? ›
Which Industries Are Most Affected by a Recession?
- 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.
Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
What happens to regular people during a recession? ›
Another way recessions affect the average person is that credit access all too often declines. Even if you have the income to support a loan now, lenders are warier of handing out money when everyone's job security is on the line. They may more heavily scrutinize your financials, credit score and credit history.
Which is worse, inflation or recession? ›
Inflation, which can be driven by high demand, can often be a byproduct of an economy that is still growing, he noted. But “neither is really great,” he said — and it's understandable why inflation might be just as frustrating for consumers as a recession. “Objectively, a recession does more overall damage,” he said.
How long do recessions last? ›
According to the National Bureau of Economic Research (NBER), the average length of recessions since World War II has been approximately 11 months. But the exact length of a recession is difficult to predict. In general, a recession lasts anywhere from six to 18 months.
What was the worst recession in the US history? ›
The last time the U.S. experienced a recession was in 2020. But that was a relatively short recession. The biggest recession in U.S. history sparked the Great Depression, between 1929 and 1933, though the Great Recession (2007-2009) was the worst in modern times.
What sells the most in a recession? ›
Toothpaste, deodorant, shampoo, toilet paper, and other grooming and personal care items are always in demand. Offering these types of items can position your business as a vital resource for consumers during tough times. People want to look good, even when times are tough.
Where is the safest place to put your money during a recession? ›
Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.
Can you lose money in a savings account 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 if my bank fails during a recession?
Inflation, which can be driven by high demand, can often be a byproduct of an economy that is still growing, he noted. But “neither is really great,” he said — and it's understandable why inflation might be just as frustrating for consumers as a recession. “Objectively, a recession does more overall damage,” he said.
What makes money during a recession? ›
What businesses are profitable in a recession? Many investors turn to stocks in companies that sell consumer staples like health care, food and beverages, and personal hygiene products. These businesses typically remain profitable during recessions and their share prices tend to better resist stock market sell-offs.
How long did it take to recover from the 2008 recession? ›
Following these policies, the economy gradually recovered. Real GDP bottomed out in the second quarter of 2009 and regained its pre-recession peak in the second quarter of 2011, 3½ years after the initial onset of the official recession. Financial markets recovered as the flood of liquidity washed over Wall Street.
When was the last US recession? ›
The COVID-19 recession was the shortest on record, while the Great Recession of 2007-2009 was the deepest since the downturn in 1937-1938.
