What is a recession? Chancellor comfortable with the economy shrinking if it would help to cut inflation
Chancellor Jeremy Hunt has said he is comfortable with Britain being plunged into recession if it will help lower inflation.
He said he would support the Bank of England increasing interest rates higher, potentially towards 5.5 per cent, as it contends with high prices.
The Bank of England no longer expects the UK to enter a recession in 2023, after announcing that the economy was expected to grow slightly in the second quarter of this year. This means the technical definition of a recession – which is two consecutive quarters of contraction – will not be met.
In its projections last month, the Bank’s Monetary Policy Committee said the UK’s gross domestic product (GDP) would decline by 0.1 per cent in Q1 and another 0.4 per cent in Q2. This would lead to a recession. However, it has now said it expects the economy to grow marginally in the second quarter.
UK inflation unexpectedly rose in February to 10.4 per cent, close to its highest level in 40 years.
The rise was as a result of food and non-alcoholic drink prices increasing by the most in more than 45 years. It also forced the Bank of England to raise interest rates on Thursday to 4.25 per cent to slow price growth.
It is the first rise in inflation since October 2022 and leaves price rises a long way from the Bank of England’s goal of 2 per cent. In addition, the rise makes Mr Hunt’s Spring Budget forecast that inflation would fall to 2.9 per cent by the end of the year appear less likely.
Inflation had fallen for three consecutive months before February. It had dropped from a peak of 11.1 per cent in October to 10.1 per cent in January before last month’s unexpected drop.
As part of the Spring Budget announcement, Mr Hunt said the economy was forecast to grow by 1.8 per cent in 2024 and 2.5 per cent in 2025, according to Office for Budget Responsibility forecasts.
Measures announced in the Budget contributed to the change. The Bank said policies announced last week by Mr Hunt could increase GDP by around 0.3 per cent over the coming years.
But what is a recession and what have experts forecasted for the UK this year?
What is a recession?
A recession is defined as two successive quarters of decline in GDP. It is the common measurement of the size of a country’s economy.
In the UK, it is measured in sterling and is a calculation of the value of goods and services produced over a period of time.
But the measurement most people focus on is the percentage change – the growth of the country’s economy over a period of time, typically a quarter or a year. It has been used since the 1940s.
A recession happens when the GDP figures turn negative and the economy goes into decline.
If a recession carries on for a long time, or is particularly bad, it is known as a depression.
Will we see a recession this year?
The Bank of England now thinks there will not be a recession in the UK this year, having previously said there would be.
There is set to be growth in the second quarter of this year, while economists previously said there would be a decline.
Mr Hunt warned in February that the UK was “not out of the woods yet”.
He said: “The fact the UK was the fastest-growing economy in the G7 last year, as well as avoiding a recession, shows our economy is more resilient than many feared. However, we are not out of the woods yet, particularly when it comes to inflation.”
Meanwhile, Labour’s shadow chancellor Rachel Reeves last month called for “urgent measures” to be brought forward to alleviate the cost of living crisis.
When was the last recession?
The UK entered a recession in 2020 because of Covid lockdowns and it lasted for six months.
The economy plunged by 20 per cent between April and June in 2020, as businesses closed and people were ordered to stay at home. GDP had fallen by 2.2 per cent between January and March that year.
At the time, the ONS said: “This is the largest quarterly contraction in the UK economy since ONS quarterly records began in 1955, and reflects the ongoing public health restrictions and forms of voluntary social distancing that have been put in place in response to the coronavirus pandemic.”
The biggest recent recession to hit the UK was the crash of 2008. It was caused by rising energy prices and the collapse of the housing market. This recession lasted for five quarters and was the longest one on record since the Second World War. The downturn of 2008 was global, and affected all the G7 countries.