A drop last quarter of 20.4% is the biggest contraction we’ve seen since records began.
It’s not unexpected, but months of financial turmoil mean the UK’s economy is now officially in recession.
The last time this happened was following the 2007 financial crisis – but what exactly does it mean?
What is a recession?
The economy’s health is generally measured by the GDP (Gross Domestic Product), which is the value of goods and services produced. It can increase or it can fall.
If a fall happens over two consecutive quarters, so six months, then it’s officially a recession. That’s what’s happened here in the UK.
Watch my latest YouTube video for more on this topic
The UK in recession in 2020
The latest figures from the ONS show the economy down across the first two quarters of 2020 -from January to June. For the first three months, it dropped 2.2%, but in the last three months it shrank by 20.4% – that’s the biggest fall since records began in the mid-1950s!
And the reason this has happened is lockdown, with shops, pubs and restaurants closed, construction paused and factories shut. So no money was being spent, nothing was being sold, and the GDP took that huge hit.
We won’t be the only ones. The USA and Eurozone already in recession – but it looks like we’ll have one of the biggest falls in GDP.
Of course, many UK businesses started to reopen in June, and there was growth in May and June. This may continue and mean officially the recession is over. But don’t forget these increases were coming after that massive drop – and it’s a long way back to pre-COVID levels
The Bank of England thinks the economy will fall by 9.5% in the UK this year, and the IMF estimates the world economy will drop by 4.9% this year. The worst since the 1930s.
And of course, we don’t know if there’ll be a vaccine any time soon, or a second wave and more localised or even national lockdowns, all unknowns will make a huge difference recovery.
And don’t forget Brexit! The strong possibility of a no-deal departure in January will have it’s own impact.
What this means for us
The main effect will be more job losses. We’ve seen 730,000 since March, and the total unemployment could reach 2.5 to 3 million by the end of the year with furlough tailing off and ending on 31st October.
And to make matters worse, there will be less job openings – not just for the recently unemployed but also new graduates.
We could also see public and private employers introduce pay cuts or pay freezes.
All of these mean less money for people to spend on themselves and to put into the economy.
But they also mean less tax will be paid to the government. Obviously that’s a problem. They’ve borrowed a huge amount of cash for the various stimulus measures such as furlough and extra spending on the NHS. That already needs to be paid for.
And tax is also vital for everyday spending. That means less money to spend on the country, from social care to education to welfare to health… the list goes on.
The last time there was rececession here in the UK was at start of 2008. Over five quarters GDP fell by 6%, triggered by debt payments in USA, and led to the worldwide banking crisis.
And we know what happened there – austerity saw cuts across government, and those most in need lose out as benefits were frozen.
How to prepare your finances for recession
If you’re worried about redundancy, make sure you know how it works and what it’ll mean for your income. Here’s a recent episode of Cash Chats where I go into detail.
After this, it’s vital you don’t delay taking a good look at your money and fix any issues now rather than later. Do everything you can to get them in the best possible place.
Look at those debts, get on the best deals, trim the waste, set up a budget, build up your savings.
These are the things I write about every week on the blog and talk about on the podcast and YouTube.
As a starting point, take a look at my Money Makeover series of videos, which will take you through all the ways to get your bills, spending and debts as healthy as possible. From there, just take any post on the blog and use it to better understand your finances.