I am very out of the loop with economy and politics but the economic crisis is slowly taking its toll and I wondered what the likelihood of seeing the end soon is.
Is this like the ’08 recession even though we aren’t technically in a recession? What difference does it make being in a recession and not?
Is it ever likely to get better? If so, realistically, when?
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The UK economy is expected to shrink by 0.6% in 2023 due to high energy prices, rising mortgage costs, increased taxes, and worker shortages. This is in contrast to the growth seen in 2022 when the UK had one of the strongest growth rates in Europe. The shrinkage could lead to companies making less money and higher unemployment rates. The IMF predicts growth for the UK in 2024, but the economic environment has worsened after September’s mini-budget due to tax and interest rate rises. Despite short-term challenges, the UK is still predicted to grow faster than Germany and Japan in the coming years if they stick to their plan to halve inflation.
I question the premise of this about the UK being in a crisis, but I will try to answer. A crisis isn’t a very scientific term, its more or less a newspaper term. “There is a crisis in the UK!” Sounds scarry.
I don’t know the current GDP quarterly projection for the UK but other posters have said its negative. To be clear data about how much an economy is growing or shrinking tends to be adjusted after it first comes out. So someone might say GDP is 4.5% for 2022, but later in 2023 they say GDP for 2022 was really closer to 3.3.
So the measure for economic growth is GDP (Gross Domestic Product). Its a formula that is mostly made up by economists to try to compare and learn something about how well the economy is going in a country. Its a very imperfect measure. The GDP may be growing but you could be laid off and feel very poor. In fact, the GDP could be growing and ONLY ONE PERSON could be getting extremely rich while everyone else is getting poorer. That is an unrealistic statement but the math could work out in a fantasy world.
So a recession is a term that economists use to indicate that a countries GDP is shrinking for 2 successive quarters. That hasn’t happened yet in the UK so… not in a recession. Remember that the data often gets revised downward as time goes on thats how its possible to be in a recession and not know it yet 🙂 Funny isn’t it?
What is this GDP and why does this have anything to do with the wellbeing of the UK? Well, the GDP is basically the sum (complicated math here) of all the goods and services produced in the country. You can think of it as the country’s income. If GDP goes up, then the country got a raise, and if it goes down then the country got a pay cut.
Thats the key part. If you are in a recession, the country got a pay cut. That means, on average, the country has a little less spending power (or value, or whatever) than it did previously. That typically leads to deficits and budget cuts and its usually indicative of the population having less… fewer jobs, less income, etc
So the UK may or may not be in recession. What IS going on there is a huge adjustment. Brexit, and the covid pandemic radically changed the economic playing field for the UK. While the effects of Brexit are more clear the covid pandemic snarled supply changes and really impacted inflation. Further, the war with Russia has seriously messed up the oil/gas commodity markets. Markets that were good may not be good now, and new markets may be opening up. IE, many people had jobs trading with Europe that may now be screwed, but perhaps (since GDP is going up) there are other opportunities happening. Market adjustments are major disruptors and generally people don’t like them. It means the old way of doing business isn’t the new way of doing business.
That is happening in the UK. You may have an opinion about Brexit being good or bad, but no matter your opinion, the fact on the ground is that the British economy is going to change because of Brexit and some people will be losers and some people will be winners. The winners won’t feel a downturn but the losers will.
Will it ever end? Yes, the rules of the game changed with both Covid and Brexit. But there are new rules, and the economy will stabilize. The loosers will find new jobs and move on and hopefully find new ways to prosper. If the GDP keeps growing this will be a good sign. If the GDP growth stalls out then its kind of a sign that the country is doing something wrong, or generally didn’t recover from the economic changes well.
The current UK situation is very different to ’08.
In ’08, there was a *banking/debt crisis*. Basically, banks can create money by borrowing it from the future. We call this borrowed money *debt*. Banks are supposed to be responsible in how much debt they create, but in the years leading up to ’08, they created way, way more debt than was sustainable, and ’08 was when it all collapsed. The banks realised the money they had borrowed from the future couldn’t be repaid, causing huge sums of money to vanish, which triggered the global recession.
This affected ordinary people because a lot of companies suddenly went bust, causing lots of people to lose their jobs. It was a crisis that affected people very differently – if you lost your job, it created huge problems, but many industries were less affected.
Right now, things are very different; we have an *inflation crisis*.
We can think of an economy as a gigantic machine made of many cogs, gears and wheels that all work together to create things. Right now, that machine has a lot of problems – worker shortages and high energy prices mean the cogs and gears of the machine are struggling to produce things as efficiently as it has in past, and prices are going up as a result.
Another way to think of inflation is the *value of money going down.* The utility of the money in your bank account is lower every day, so you are getting poorer, even though you have the same amount of money. The way to control inflation is to raise interest rates, so peoples mortgage payments are increasing massively, which puts pressure on homeowners. It also puts pressure on the renter market, because landlords need to raise rents on the property they have taken out mortgages to buy. This affects everyone, because the basic costs of living are increased.
Other comments did a good job explaining how it’s different from 08, so gonna focus on the other questions. i’m not an expert so please correct me.
*What difference does it make being in a recession, and not?*
Let’s break down the basics of an economy.
An economy is very much based on giving and taking. It functions on people contributing to the economy, and the economy giving back to people.
In practice, “contributing to the economy” is earning a wage, paying taxes and bills, and buying products.
1. Earning a wage relies on stable employment. People have to want to work, be able to work and feel their work is valuable.
2. Paying taxes and bills relies on people earning money to make a living and contribute to the Government and electric, public service and water industries.
3. Buying products relies on having enough of a wage from work and taxes, to contribute to industries. These products can be human needs, like food industries. Or from markets such as fashion markets.
It gets slightly more complicated however, as a stable economy is a balanced economy.
If people spend too much, prices rise, money loses its worth.
If people spend too little, industries and markets suffer.
People are currently spending too much. When people buy buy buy buy. Industries increase their prices, so that there is enough to go around (supply) As things get more expensive, the pound gets less valuable. The Government needs to lend more money, pay their workers more. Bad bad news for the economy.
So currently the goal is to lower people’s spending, by increasing interest rates, making it harder to take out money.
This has a negative impact on the consumer and the industries. People don’t have enough money to spend on industries which can then lead to a recession. When industries and markets struggle to survive and are forced to lower prices.
When will this end? Economists predict interest rates will continue to increase until 2024. Which could possibly dip the UK into a recession. Not enough money to spend on things.
Some argue recession is inevitable at this point.
Some argue there is still hope.
The future is uncertain.
The UK is being adversely affected by numerous factors:
– Brexit – making importing consumer goods more expensive, making selling our products more expensive to potential customers abroad. More money buying less stuff for our general public, impacts the on the cost of living, prices go up.
– Stagnating wages. After 2008, money was cheap. Everybody borrowed, including the Government, and it all got squandered on dodgy schemes and incentives, tax cuts for the wealthy etc. It should have been invested in business, in infrastructure, in productivity, in investing in skills etc. As a result, businesses must recruit more workers to do the same job as perhaps two or three workers twenty years ago, even with the advent of modern computing etc. As a result, businesses are paying people less, but hiring more people.
– Covid – absolutely caused more hardship than it needed to, thanks to the haphazard way that most of the global players handled it financially. Printing money into an already bloated global system didn’t seem like a bad idea right up until the cost of the borrowing starts to hit home. A lot of important sectors in the UK got ravaged by Covid and are only just starting to recover.
– War in Ukraine – wheat, oil, minerals, raw materials all stuck in country despite a new agreement not to attack/seize international shipping. It still means delays and the price of these products shooting up across the globe.
– Liz Truss and the Kamikwaze Budget – this nearly totally fucked the economy. Some of the biggest hedge funds and pension funds in the country nearly hit the wall because of a reckless national budgetary plan that involved borrowing loads more than we could afford to repay. We will be living this nightmare for years to come as the country repairs the damage it did.
– Profiteering – a lot of companies are claiming that they are just passing the cost onto the consumer but it’s just not true. Plenty of companies are taking this chance to use the market conditions to their advantage and charge higher prices, well, because they can.
Let’s be clear here, the UK is not in a recession (yet, maybe it wont) but millions are suffering still, more so than in recent living memory.
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