The UK economy is in recession. What does this mean for everyone?
As the economic forecast for the UK grows increasingly gloomy, it seems the recession that was once described as “looming” or “forthcoming” is now being qualified as “current” and “present”. Commonly associated with increased unemployment, lower inflation and slumped housing markets, a recession does not only represent a thorn in the flesh of the Government and large corporations, but is a term capable of sending shivers down the spine of an entire nation. But what exactly constitutes a recession and why are we so fearful of them? Economists are at odds with each other when it comes to settling on a single definition. While some analysts use population growth as a yardstick and others take unemployment rates into account, everyone is in agreement that an economy is deemed to be in recession when it experiences a period of sustained decline. In other words, when the total measure of goods and services produced by a country, or GDP, is seen to contract for two successive quarters, it is said to be in recession. The extent of the recession depends on the duration of this contraction. If GDP rebounds after two quarters of negative growth, the recession can be described as mild. However, should the decline in economic activity persist, the recession becomes full-blown. Guided by the above definition, it is impossible to say how long the current economic downturn in the UK will last or even whether the country is in recession for certain. The Office for National Statistics publishes estimate values for GDP on a quarterly basis. These figures are later confirmed and sometimes need to be revised. For example, GDP values for the last six months of 2008 will not be official until 2009. This explains the Government’s reluctance to use the term “recession” when referring to the economic slowdown. Not all commentators share the same hesitancy. Bodies such as the European Commission and the Organisation for Economic Co-operation and Development (OECD) have predicted that the UK economy will shrink in the second half of this year. Technicalities notwithstanding, the UK economy is certainly showing signs of deceleration. It appears that recession is not only inevitable but already upon us. Before considering the implications of this negative growth for the average consumer, let us first examine how it impacts the economy as a whole.
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Few businesses are immune from the effects of fluctuating tax, interest and unemployment rates. Trends in these areas reflect the state of the economy at present and can also provide a good indication of what to expect in the future. Some of the predominant characteristics of the current economic situation are as follows:
- Falling share prices
One of the first areas of to be hit in times of crisis is the stock market. It is liable to react badly purely in anticipation of an economic slowdown. Because recessions are generally synonymous with reduced profitability, this means that people are less inclined to invest in dividends, therefore lowering the value of shares.
- Shortage of credit
Still reeling from subprime mortgage financial crisis, many banks in the UK have been forced to reduce the availability of credit. When money is lent, it is at an increased rate. This means that it is more difficult for mortgage applications to be approved. Fewer mortgages lead to a reduced number of house being sold, resulting in a depressed housing market. Equally harmful is the effect of more stringent lending conditions on consumer confidence. With less equity at their disposal, consumers are less likely to spend, further damaging the economy.
- Higher unemployment
In a tougher economic climate, businesses are often forced to shed employees in order to survive. As inflation decreases due to a lack of demand, those who succeed in retaining their position may be forced sacrifice a pay rise. It can take longer for the effects of a recession to filter down to the jobs market. Unfortunately, high unemployment rates can linger for an extended period once economic growth has been restored.
- Increased Government borrowing
Job losses and failing businesses will entail a loss of revenue for the Treasury in terms of income tax and corporation tax. In a bid to recover from these losses by stimulating the sluggish economy, the Government will often lower taxes and interest rates. The added strain of increased spending on unemployment benefits, not to mention the part-nationalisation of several of the countries largest banks, will also increase the need to borrow money. In order to recuperate, taxes and interest rates typically rise again and can remain high after the recession has passed.
Regardless of whether you are directly affected by the factors listed above, the fact remains that the economic health of the country will influence the financial stability of the entire population. Indeed consumers are already feeling the squeeze. Pension funds and investment schemes linked to the FTSE 100 have suffered huge devaluations, car sales have plummeted, more people are competing for fewer jobs and food and fuel prices are on the up. This tougher economic environment does not only hit bank balances, but also has a psychological impact on the nation. The failure and subsequent bailout of some of the countries largest banks seriously dented consumers’ trust in the financial system and led people to question whether their money was secure. These doubts are further disseminated by the media, as audiences are bombarded with reports painting a gloomy picture of the economy, culminating in an even bigger blow to consumer confidence. As a result, many people adopt a more cautious approach to spending, ultimately to the detriment of the financial system thus fuelling economic decline and driving the belief that fear of recession is a self-fulfilling prophecy. On a more optimistic note, some experts claim that a recession can in fact benefit the economy in that it forces companies to become more efficient and weeds out failing business. However this will come as little comfort to the average consumer, struggling to emerge from the shadow of uncertainty that recession casts over their finances.
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