The UK economy has officially entered a recession for the first time in 11 years, after contracting by a record 9.9% in 2020 due to the impact of the coronavirus pandemic and the Brexit transition. A recession is defined as two consecutive quarters of negative economic growth, and the UK has now experienced three quarters of decline since the first lockdown in March 2020.
Why is the UK in recession?
The recession comes after households and businesses were battered by ongoing cost pressures and a lengthy run of interest rates that took Bank rate to 5.25% – the highest level since 2008. This heaped further cost pain on millions of mortgage borrowers, with all but the most in need seeing no energy bill or cost of living support this winter from the Government.
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The recession has affected almost every sector of the economy, but some have been hit harder than others. The hospitality, leisure, travel and retail industries have suffered the most from the restrictions imposed to contain the virus, while the manufacturing, construction and financial sectors have shown some signs of recovery in recent months.
The recession has also had a significant impact on employment, with the unemployment rate rising to 5% in December 2023, the highest level since 2016. More than 800,000 people have lost their jobs since the start of the pandemic, and millions more are relying on government support schemes such as furlough and self-employment grants.
The government has announced several measures to support the economy during the crisis, such as extending the furlough scheme until April 2024, providing grants and loans to businesses, and offering tax relief and deferrals.
However, these measures have also increased the public debt, which reached a record £2.13 trillion at the end of December 2023, equivalent to 99.4% of GDP. The government faces a difficult trade-off between stimulating the economy and balancing the budget in the coming years.
The outlook for the UK economy remains uncertain, as it depends on several factors, such as the evolution of the pandemic, the effectiveness of the vaccination programme, the outcome of the trade negotiations with the EU and other countries, and the consumer and business confidence.
Chancellor Jeremy Hunt has said the recession comes off the back of high inflation and the recent run of interest rate rises, but insisted the economy was now turning a corner. It is likely to reinforce the case for the Bank of England to start cutting interest rates in 2024, given the threat to the wider economy from painfully high borrowing costs.
Some economists expect a strong rebound in economic activity once the lockdown restrictions are eased and most people are vaccinated, while others warn of a slow and uneven recovery that could take years to return to pre-pandemic levels.
The recession is a challenging and unprecedented situation for everyone, but there are also some opportunities for innovation and transformation. The pandemic has accelerated some trends that were already underway, such as digitalization, automation, remote working and online shopping.
These trends could create new jobs and markets, improve productivity and efficiency, and reduce environmental impact. The recession could also be an opportunity to rethink our economic model and priorities, and to invest in more sustainable and inclusive growth that benefits everyone.