Well we know it’s not a good thing, as it’s uttered in such solemn tones – but what does ‘being in a recession’ actually mean?
A little bit of economics
When a country’s economy is functioning well, it grows year-on-year. The measure of a country’s economy is called its Gross Domestic Product (GDP).
Confusingly, there are three ways that GDP can be calculated:
- ‘Total spending’: literally, what everyone has spent. Government spending + household spending + net exports (so that’s minus the imports from each country we exported to) + investment.
- Everyone’s income added together
- The country’s ‘output’: how much all the goods and services the country makes are worth
Important point: no matter how you’re choosing to measure it, if GDP is going up then then businesses are getting bigger because people are spending more.
GDP, and all its related terms, are used all the time to talk about the health of the economy. It does not encompass everything about the country’s economic state, there are many things it doesn’t tell us. But it is one way to discuss it.
Economically speaking, a year is divided into three month quarters. Many measurements are taken and compared quarterly, it’s how things are tracked.
In the UK and Europe, a recession is when a country’s GDP falls for two consecutive quarters of the year.
This definition is not the same in all countries. So, if you’re comparing internationally, you need to be clear about those differences.
Why do recessions happen?
There are different reasons why countries go into recession. Two major ones are collective debt and a ‘sharp shock’ to the economy.
Put simply, if people and businesses cannot afford to repay their debts, the banks run out of money. Financial institutions are global organisations, so a horrible domino effect spreads across the world.
A ‘sharp shock’ is exactly what we’ve got now with the global COVID-19 health pandemic. Something outside the financial world that has a devastating impact on our usual ways of producing, transporting and buying goods and services.
The continued impact of lockdown means that the UK is now in a recession. Between April and June, the economy shrank by 20.4% (compared with the first quarter.) This means that our GDP is down by 20.4%, the UK’s economy has diminished by one fifth compared to its level before coronavirus hit.
Well, it’s not good for the individual or the government’s wallet. As a taxpayer, you may face redundancy, reduced hours or cuts in your wages as your employer struggles to recover. As a business, you might be looking at changes to capital gains tax.
As a country, less people and businesses are paying the country’s income – tax. Leaving the government with the prospect of a combination of raising taxes and cutting services.
Both deeply unpopular with people already at the end of their financial tether after a decade of austerity. And at a time where more people and businesses will need services and are less able to pay higher income tax or capital gains tax bills.
As this new disease is still somewhat unknown, it is impossible to predict exactly how or when we have a resolution. When the Chancellor announces any further changes or support packages, we will keep you up to date.