THE Bank of England has been forced to step in following the collapse in the value of the pound after Chancellor Kwasi Kwarteng’s “mini budget” last week.
In an effort to stabilise the markets the Bank has announced that it will carry out temporary purchases of UK government bonds “to restore orderly market conditions”.
But what does it mean for the economy as a whole? And is the UK heading for another recession?
What is a recession?
A basic definition is that a recession occurs when a country’s economy goes into decline for a significant period of time, be it months or even years.
A healthy economy is supposed to expand over time. However, experts assert that an economy is in recession when it has two consecutive quarters of declining Gross Domestic Product (GDP).
Recessions can be caused by many things such as excessive debt or overly high inflation. But they can also be caused by sudden economic shocks.
For example, many countries – including the UK – went into recession during the first wave of the coronavirus pandemic.
What does it mean?
Essentially, it means that there is less money in the economy.
This can translate into businesses laying off workers and even being forced into bankruptcy if sales fail to pick up.
It also means that assets such as stocks and property can lose their value.
With less people being able to pay their bills, financial institutions also tend to tighten the regulations on who they are willing to lend to.
To qualify for a loan during a recession lenders often require better credit scores or larger down payments than they would in a normal economic climate.
All of this can have an impact on people’s lives, with things like finding a job or applying for a mortgage becoming more difficult (or expensive).
Are we currently in a recession?
According to the Bank of England, the UK economy may already be in recession.
This year’s third quarter results (between July and September) are expected to show that the UK economy has shrunk by 0.1%. This follows on from the same level of decline in the last quarter (between April and June).
Applying the technical definition this would mean the UK economy is in recession.
The rising cost of energy, high inflation, and the failure of wages to keep up with inflation have all been blamed for this period of economic decline.
And though much is still uncertain, it appears that the UK Government’s mini budget has only made things worse.
