The cost of living crisis is beginning to bite hard in the UK, with inflation having peaked at a 40-year high of 9.4% in June.
Incredibly, this is expected to increase to 12% in October when the next energy price cap rise kicks in, while real wages (which refer to salaries adjusted for prices) have already slumped to record lows in recent weeks.
Unsurprisingly, many Brits already think that they’re in the midst of a recession, while just over half (55%) believe that this will occur before the end of 2022. But what’s the technical definition of a recession, and are we likely to experience one this year?
What is a Recession?
Despite the immense economic challenges facing households and businesses at present, the UK is not currently in the grip of a technical recession.
This term describes a scenario where a national economy contracts over two consecutive quarters, with this measuring a marked decline in gross domestic product (GDP) over a total period of six months.
So far, the Bank of England (BoE) has refrained from predicting a recession in the UK, although it has forecast a significant downturn as 2022 draws to a close. This could result in a contraction of 1% during the final quarter of the year, with any talk of a recession dependent on the economic performance during Q3 and the opening three months of 2023.
So, although we can’t predict that the UK will enter a technical recession this year, the UK’s GDP is forecast to remain below 2022 levels for the whole of 2023 as the economic squeeze continues largely unabated.
Could the UK Enter a Recession in 2022?
Talk of a potential recession gathered momentum in April and at the beginning of the second quarter, when it was revealed that UK GDP had shrunk by 0.3%.
April was the first month that all main economic sectors (namely manufacturing, construction and services) contributed negatively to the UK’s GDP since January 2021, when the UK was plunged into a further period of lockdown and many businesses were required to close their doors.
Another reason for this was the decline of the NHS Test and Trace Program, which depreciated by 70% as the UK government largely abandoned this and removed all coronavirus precautions following a surge of social pressure.
It’s unclear whether the economy will contract further to create a recession during Q3, but there’s no doubt that several worrying trigger factors remain in place. Perhaps the Russian invasion of Ukraine is the most pressing, as this continues to impact supply and demand in the energy market and send the cost of fuel soaring.
This remains the primary driver of inflation in the UK, while this situation is likely to get worse before it improves when a further energy price hike is rolled out in the autumn.
Of course, the government has looked to tackle this issue by initiating a series of base rate hikes since December (five in total), with further increases proposed in the coming months. The reason for this is simple; as interest rates and inflation enjoy an inverse relationship, and increasing the former should help to cap the latter over time.
In the near-term, however, this will increase the cost of borrowing and further exacerbate the challenges facing households and businesses alike. With non-fixed rate mortgage payments also expected to rise as a result, spending and GDP growth could fall further and drive the UK over the precipice of a recession.
From an investor perspective, it should be noted that these macroeconomic factors are also combining to lower the value and purchasing power of the pound.
So, if you’re learning how to trade forex for beginners, it makes sense to hedge against pound sterling for the foreseeable future as this continues to weaken against a basket of rival major currencies including the US Dollar (USD) and the Euro (EUR).
The Bottom Line
It should be noted that a technical recession is far from guaranteed in the UK, with some economists and bodies (including the Office for Budget Responsibility (OBR) forecasting overall GDP growth of 3.8% for 2022.
However, Deutsche Bank has suggested that the odds of an economic downturn are close to one-in-three for the UK, with the only question being whether the region can avoid enduring two negative quarters consecutively and head into 2023 on a slightly sounder economic footing.
Regardless, inflation will continue to rage into the second half of 2022 and potentially beyond, creating a scenario where businesses and households feel as though they’re in the midst of a serious economic recession.
In this respect, the technical definition of a recession means little to households, business owners and even investors, with the key focus being on the ability of governments and agencies to lower the cost of living and restore some semblance of economic growth.
Is the UK Heading Towards a Recession?