What is a recession as economy achieves surprise growth in November

However, “the possibility of recession still looms large,” as both the Office for Budget Responsibility and the Bank of England anticipate a decline in the economy in the first half of 2023.

The Bank of England had previously said it expected a 0.1 per cent fall in GDP over the current quarter, indicating that the UK is in a recession.

In November, it raised interest rates by 0.5 per cent points to 2.25 per cent, having raised them by the same amount on August 3 in an attempt to curb soaring prices. Interest rates are now at the highest level since November 2008.

The Bank blamed the decline in output in part on rising gas prices following Russia’s invasion of Ukraine.

The decision to hike rates was an effort by the Bank to tackle inflation – or rising prices – which has a recessionary effect on the UK economy by reducing demand.

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.

GDP 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 (three months) or a year. It’s 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.

Why did we think UK was in a recession?

The UK was thought to be in a recession due to higher energy prices, the conflict in Ukraine, Brexit, and the inflationary effect of industries reopening after Covid lockdowns.

Inflation is currently running at 9.2 per cent and is expected to rise further.

The minutes of the Bank’s rate-setting committee also contained news that inflation would not be rising by as much as initially expected in October.

The May Monetary Policy Report said: “Household disposable income is projected to fall in 2022 by the second largest amount since records began in 1964.”

It is expected that the economy will shrink by 0.25 per cent while unemployment will probably reach 5.5 per cent in the next few years.

Economists have warned MPs that the UK will have to go through at least a “mild recession” before inflation becomes more manageable.

London School of Economics professor Charles Goodhart said that wages and prices were feeding off each other to push up inflation, and this could not be weakened without the labour market weakening.

The National Institute of Economic and Social Research estimated in May that about 1.5 million households will struggle to pay for food and energy bills during the cost-of-living crisis. Its report predicts the Bank of England would have to raise interest rates to 2.5 per cent to try to curb soaring inflation.

When was the last recession?

The UK entered a recession in 2020 due to Covid lockdowns.

The economy plunged by 20 per cent between April and June 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.”