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What is a recession?

View profile for Nicola Ward
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Following official figures released last month, it has been declared that the UK has now entered a recession following a shrinkage in the economy of around 20%.

Many people will remember the last recession in the UK during the financial crisis. But what exactly is a recession? A recession is defined as a decline in Gross Domestic Product (GDP) over two successive quarters.

GDP is a measure of the size and health of a country’s economy over a period of time. This is measured by looking at the goods and services produced in the economy.

Recessions can impact sectors and members of an economy in a variety of different ways. Some of the key issues to arise may include:

  • rising unemployment
  • rise in poverty
  • fall in asset prices
  • higher government borrowing
  • a drop in housing prices, and
  • firms becoming insolvent

A recession can lead to a difficult period where people may struggle with financial hardships.  According to the initial statistics, the decline in the UK’s economy is one of the largest drops amongst advanced world economies. 

According to the Chancellor, Rishi Sunak, the UK economy performed more poorly than some of its European cousins. The UK was more focused on consumer spending, services and hospitality, all of which were adversely affected by the COVID-19 pandemic.

More positively, recent data from the Office for National Statistics (ONS), shows that the economy achieved some recovery from June following the easing of government restrictions. There is also optimism that the recovery continues for the remainder of the year.

A further point is that a recession tends to form part of the business cycle, which refers to the stages of expansion and contraction in an economy. Understanding the different stages of the business cycle can help people with financial and life decisions as well as helping governments to make appropriate policy decisions. Understanding that a recession forms part of a natural cycle also helps to offer some reassurance.

Is it important to note that a business cycle should not be confused with market cycles. The growth and decline in the stock market do not interlink with those of a business cycle.

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