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UK headed for recession as economy shrinks – what it means for your money

THE UK economy shrunk by 0.2% between July and September new figures reveal, as experts warn the country is heading for recession.

The Office for National Statistics (ONS) said that gross domestic product (GDP) had fallen by 0.6% in September.

GDP fell by an estimated 0.2% in Quarter 3 (July to Sept) 2022

GDP measures the value of goods and services produced in the UK.

It also estimates the size of and growth in the economy.

The ONS said the figures may have been affected by the bank holiday for the State Funeral of Her Majesty Queen Elizabeth II.

This is because some business closed or operated shorter hours for the day as a mark of respect.

It could be the beginning of a recession – which is defined as two quarters of shrinking GDP in a row.

But in the last quarter – April to June – the economy grew unexpectedly by 0.2%.

This means the economy would need to shrink again in the next quarter for country to formally enter a recession.

ONS director of economic statistics Darren Morgan said: “With September showing a notable fall partly due to the effects of the additional bank holiday for the Queen’s funeral, overall the economy shrank slightly in the third quarter.

“The quarterly fall was driven by manufacturing, which saw widespread declines across most industries.

“Services were flat overall, but consumer-facing industries fared badly, with a notable fall in retail.”

Today’s figures come just a week after the Bank of England warned that the UK could be facing the “longest recession in 100 years“.

However, the Bank itself cautioned that this would only happen if it raises interest rates to around 5.2% – which the market was expecting at the time

But it doesn’t expect rates to reach such a high level now, which would imply that the recession could be less drawn out.

Responding to the figures, Chancellor Jeremy Hunt said there is a “tough road ahead” that will require “extremely difficult decisions”.

He said: “To achieve long-term sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way.

“While the world economy faces extreme turbulence, the fundamental resilience of the British economy is cause for optimism in the long run.”

The Bank of England (BoE) uses GDP as one of the key indicators when it sets the base interest rate.

Last week it unveiled the biggest interest rate rise since the 1980s – increasing rates to 3%.

The hike is usually passed on to consumers in the form of higher interest rates on mortgages and other borrowing.

Savers could earn more on the cash they have in their accounts, though banks are usually slower to pass on a rate increase on savings.

Alice Haine, personal finance analyst at Bestinvest, said: “As we head into winter and a potentially long, drawn-out recession, consumers are right to be fearful of bleak times ahead.

“Food inflation rose by 14.6% on the year to September, while those remortgaging now are facing monthly repayments hundreds of pounds higher. 

“A scaled-back Christmas will be crucial for those whose budgets are already squeezed to the max.”

What is a recession?

A country is in recession when its economy shrinks over a sustained period of time, rather than growing normally.

It is calculated using something called Gross Domestic Product (GDP), which in the UK is the value of all the goods and services added up in pounds. 

Generally speaking, if the GDP has fallen over two quarters (or six months), a country is said to be in recession.

Recessions are bad news, because they usually lead to unemployment and wage stagnation.

This in turn means the government gets less tax, which could mean cuts to services and benefits, or that rates go up.

There are lots of different factors that can cause a country to tip into a recession.

The UK last went into recession in 2020 after the coronavirus pandemic hit.

What does a recession mean for your money?

Job losses are common, as companies try to cut their costs to stay afloat.

Businesses may also go into administration or go bust.

The 2008 recession, for example, saw the loss of high street stores including music retailer Zavvi, clothes shop Principles, and stalwart Woolworths.

The Government may make cut backs or raise taxes to try and shore up its finances – alternatively, it may decide to increase budgets to spend its way out of the problem.

Personal finance analyst Alice Haine says raft of tax rises and spending cuts can be expected when Chancellor Jeremy Hunt unveils his Autumn Statement next week. 

If inflation soars – as it is at the moment – people will find their wages cannot keep up and their money doesn’t go as far as it used to.

The Bank of England had predicted that inflation will peak at around 11% at the end of this year.

This is something we are seeing in the current cost of living crisis with everything from energy billspetrol prices and groceries going up.

At the same time, latest data shows that workers have seen a 1% fall in their “real” wages as any pay increases fail to keep pay with rising prices.

In a recession, the number of people in debt and arrears is likely to saw, and there could be more defaults on loans and mortgages or repossessions and bankruptcies.

How to protect your finances

If you’re worried about your finances, there are steps you can take to try and keep your cash safe.

Go through all your bank statements and accounts so you know exactly where your money is going each month.

Of course, there are bills that you can’t avoid paying – but that doesn’t mean you can’t cut back in other ways.

For example, you could save money by moving to a cheaper mobile phone tariff or axing subscriptions you don’t need.

When money is tight, it can be tempting to ignore debts – but this will only make your financial situation worse.

Stay on top of what you owe and always repay priority debts.

There are also plenty of organisations where you can seek debt advice for free.

These include:

You should also check what benefits you are eligible for.

Entitledto’s free calculator works out whether you qualify for various benefits, tax credits and Universal Credit.

If you don’t want to register, consumer group and charity StepChange both have benefits tools powered by Entitledto’s data that let you save your results without logging in.

There is also emergency funding available for struggling households, which is dished out by local councils.

The Household Support Fund is designed to help those in most need with payments towards the rising cost of food, energy, and water bills.

Help available varies, but you could get free cash, food vouchers, and help for bills like rent and energy.

You could also get similar help from your council under the welfare assistance scheme.

There was a spike in grants dished out over the Covid crisis, with the number of councils handing out grants soaring by 210% in some places, a Sun investigation found.

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