UK on The Verge of Recession: All You Need to Know

A country is said to be in recession if the economic downfall continues for more than two or three months. Currently UK is facing a major economic showdown since its last recession in late 2000’s after the world war. The bank of England has warned the people of really tough times ahead with shrinking GDP and a longer recession this time. The GDP shrank from July to September by 0.2%.The pound is down the rubble and the interest rate is soaring high; inflation rate is out of control. A Political turmoil and some wrong decisions have led the UK to be in the situation where it is today.

The pandemic has caused the economy an unparalleled setback. According to the Office of National Statistics (ONS) during the first national lockdown that is from April to June 2020, the GDP has fell by 19.4%. Furthermore, all the precautionary measurements’ taken by the government which include travel restrictions and closure of hotels, parks etc had  caused a surge in the unemployment rate from 3.8% in 2019 to 5.2% in 2020 and a decrease in the spending of house hold fell 20% during the lockdown.

BREXIT was quite a conundrum in the UK and had also led to the resignation of Theresa May. It all started with the referendum in 2016 and UK officially left the EU ON 31ST January 2020. All the clear effects of BREXIT on UK’s economy  cannot be estimated due to its timeline coinciding with the pandemic but it’s said to have a generational and long- term effect on the UK. The country has lost market share in Japan, US and Canada. Although it did not have much impact on the export of the UK as predicted but it’s been counted as the major stimulant of the drowning economy it has changed the outlook of the structure of the economy and made it more of a closed economy. The industries of the UK such as the mechanical industry according to economists will be affected the most. BREXIT has caused a decrease in daily wages and increases in the inflation. Estimated 1.3% labor productivity will be reduced in the coming decade.

The most impactful event this year which not only affected UK’s economy but also jolted the major economies is the Ukraine Russia war. Russian gas cuts are such a catastrophe for the barely surviving economy that the inflation has touched the 40-year high of 9.9% and has hiked the gas and electricity bills has increased by 100% despite the capping and the pound becoming one of the worst; performing currency by its value dropping 24% against the dollar. According to National Energy Action (NEA) October last year 4.5 million households were in fuel poverty but today estimated 6.7 million households are in fuel poverty. Increase in fuel prices will further increase the inflation and fewer investments due to the fluctuating price of the pound.

Political instability has also added to the already slumping economy as the investors do not invest in the market with such instability and continuous changes in the state policy on different issues majorly the interest rate. From BREXIT to today many prime ministers resigned or were forced to resign by their party due to their economic policies. From David Cameron who started this discussion of BREXIT himself was in favour of UK sticking to a reformed EU and even campaigned for the same but when in 2016 52% people voted in the favor of BREXIT as compared to 48% he resigned from his position as a prime minister. He faced a lot of criticism for starting this never-ending debate. He was succeeded by Theresa May she came forward with her plans of a BREXIT deal to attract the labor party but she even lost the support of her  party her BREXIT deal was rejected three times by the parliament after which she was forced to resign under immense pressure. The government was then taken over by Boris Johnson who carried out the BREXIT but his policies regarding the COVID pandemic was criticized as the economy had hit a new low and there was a record rise in inflation. He was accused of mishandling the pandemic and was also forced to resign followed by Liz Truss who remained in the office for 50 days only.

Due to the building pressure because of economic instability and resentment shown by the public the Liz Truss government made a saving grace move by announcing a mini budget as promised by her during her campaign for the prime minister office but it proved to be the final nail in the coffin of her tenure and struggling economy . Liz Truss not so mini budget included a  major tax cut since 1972. The government announced a total increase of 175% in unit price by announcing a newer government cap of 520 pounds with the announcement that for the next three years even if the prices in the energy industry continues to rise the citizens will pay the same price and the loss incurred to industry will be paid off by the banks. This mini budget has plunged the economy into turmoil with the banking and bound market rate going down .The bond rate has increased up to 300% from 1% to 4.11% just in September the mismatch in the demand and supply in the bond market and the currency depreciation has made the bond market of UK useless for the investors the tax cut are expected to reduce the revenue by 445 billion dollars till 2026. The depreciation of pound with the turmoil in the bond rate will trap the British economy in a vicious cycle and will lead to housing as well as banking crisis.

A recession seems to be inevitable for the British economy, with the condition worsening every passing day; chaos in the market warning from the IMF and bank of England and pressure from the public the only two options the UK have is backward to take gas supply from Russia despite their stance on the Ukraine war, to take back the mini budget and face the challenging conditions for a while or to depend on the the USA to save them from financial crunch. They have to make the correct decision and not the public pleasing decisions.

Malaika Khaliq
Malaika Khaliq
I am a student at National Defence University, currently pursuing a degree in economics