Over the past several months, a UK recession has seemed to be on the horizon. A recession is generally defined as negative economic growth in two successive quarters. Growth is measured in terms of Gross Domestic Product (GDP). This refers to the total output of a specific country or simply the total number of finished goods and services produced.
The UK economy has been hit hardest during the current economic downturn out of the G7 countries. There are multiple factors currently contributing to negative economic growth within the UK. As there aren’t any current signs of recovery, this article discusses what has caused this situation, the possible outcomes and what could help stimulate economic growth moving forward.
Key factors pointing towards a UK recession
Cost of living crisis
The cost of living crisis has hit various countries within Europe. The UK has been affected by price increases to energy, food and gas. Due to internal and external pressure, caused by the Russia – Ukraine conflict, the limited supply of gas over recent months has forced prices to shift upwards.
Despite the UK not having a significant amount of overall trade with Russia, fuel and food are amongst the highest percentage of imports the UK does receive. As a result this has created shortages in supply and impacted prices of goods. For instance, we have seen a 54% rise in energy prices which is set by the energy regulator Ofgem.
This has created a need for the UK government to provide support and subsidies to those worst impacted by the price increases. The UK government has stated that every household will be receiving a discount of £400 for energy bills in October 2022. Although this isn’t a sustainable long term solution, in the short term it helps to relieve financial pressure currently placed on households due to rising costs.
The UK economy is currently facing stagflation. Stagflation is defined as a rise in inflation while economic growth, or gross domestic product (GDP) is falling. This means people’s wages do not stretch as far and unemployment is likely to rise. Inflation has continued to be a cause for concern within the UK over several months. With this coinciding with lower economic growth, the economy remains stagnant and isn’t showing signs towards increasing consumer confidence.
The Bank of England increased interest rates, attempting to keep up with rising inflation. This strategy hasn’t been effective as price increases are mainly due to cost-pull inflation. External factors have contributed towards the UK being in stagflation. Ultimately, it won’t be a straightforward process towards economic recovery.
As a result of the UK being seen as less economically competitive, this has had an effect British Sterling. GBP has plunged at different times during the past few months in response to higher inflation and interest rates.
Currency volatility has become a trend for GBP, which has been influenced by economic and political uncertainty over recent months. According to the Institute of Directors, there are also lower levels of optimism and confidence amongst the UK population. Factors such as inflation and raising interest rates during an economic slowdown are negatively impacting the UK economy. This is a significant issue for businesses who are attempting to weather the economic storm.
How a recession would impact the real economy in the UK
Higher levels of unemployment
A recession within the UK would likely create greater uncertainty and potential loss of jobs. Businesses would have to adapt to increased costs in imported goods, as well as supply chain issues. With increased costs and lower profit margins, industries which are particularly hit worse could start to see a higher number of job cuts.
Since the 2008 financial crisis which contributed towards unemployment rates in the UK rising to 8.4% in 2011, there has been little cause for concern. Despite inflation continuing to rise, the unemployment rate is at a 48 year low which is a positive. Nonetheless, a recession would cause greater levels of uncertainty and concern for businesses.
Prior recessions have shown that the industries which see the majority of job cuts are not the same industries that grow rapidly during an economic recovery. Consequently, this tends to lead towards surplus demand in sectors that are on an upward trajectory and surplus supply in those undergoing long-term decline.
For industries which have been hit during the current cost of living crisis, a recession could cause greater disruption and financial burden for businesses.
Increased government spending
In order to combat the economic downturn, it’s likely the government will need to intervene with new measures. As was the case for Covid–19, the government introduced the furlough scheme which helped businesses and work professionals better manage the unprecedented situation. Although it cost billions to the UK government, it has been deemed as a success for lowering the number of redundancies.
Though, it won’t be on the same scale the government will need to intervene to help reignite the economy. The government has introduced a temporary windfall tax on oil and gas firms and offered additional support for households via tax rebates on council tax bills. Nevertheless, the government will be asked to do more if a recession hits.
Innovation in established and new industries
Business innovation within industries will be a key component towards further job creation and reigniting the UK economy. Usually this innovation will come from SMEs who are agile enough to bring something new to market. According to startups magazine, small businesses in Britain achieved 3 years of innovation in just 3 months during the Covid-19 lockdown.
Companies will need to adapt and look at introducing new business models to meet customers needs. A recession would likely cause a number of small businesses to become insolvent. Although this is the case there would also likely be a similar amount of new companies created. These new companies would then have the potential of creating jobs within the economy.
Methods to stimulate the UK economy over the next 6-12 months
Limit trade disruptions
Trade disruptions have been an issue for businesses and suppliers within the UK over several months. Supply chain issues and a shortage of goods have caused a longer waiting time for imports in the UK. The EU and UK remain trade partners and continue to import and export goods within regions consistently.
The UK Government has been phasing in border controls for the majority of imports over 2021 and 2022. It will likely take another 6-12 months for businesses to have fully integrated their business model and adjusted to custom rules and tariffs. Once this has transpired this should allow for greater levels of trade between the UK and EU.
Business investment into key sectors within the economy
Business investment by foreign companies and investors will be an important part of getting the UK economy back on track. The sectors that contribute most to the UK GDP are services, manufacturing, construction, and tourism. For instance, the manufacturing industry has seen a significant decline but is still valuable to the UK economy. Ensuring that there is confidence within the financial markets that the UK remains a country which will deliver growth over the long term is important.
The bottom line
Due to both external and internal factors, a UK recession does seem to be on the horizon. Businesses and households will be impacted in different ways, which has shown through the current cost of living crisis. It will take proactive methods from the government to help soften the blow if the UK does go into a recession in the coming months.
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