While inflation soars to 30-year highs and household bills rocket, the nation has been warned if living costs seem tough to manage now, the worst is potentially yet to come. The Bank of England has forecast the UK economy could sink into recession before the end of the year.
While Britons took to polling stations to vote for favoured representatives, the BoE raised interest rates from 0.75 percent to one percent to tackle spiralling inflation compounded by the Russia-Ukraine conflict, the highest level since 2009.
With a hike in household energy bills predicted for October, the Bank forecast the GDP will contract by nearly a percentage point during this final quarter of the year.
This would see inflation jump higher than 10 percent, which would be the highest rate of inflation for Britain to see since 1982.
This latest rise in interest rates will see up to two million homeowners face an immediate increase in their monthly mortgage repayments, while other loans may get more expensive too.
Andrew Bailey, Bank of England governor, told the BBC: “We are in a very difficult position at the moment.
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“We’re walking a very narrow path now between inflation on the one side, which is much higher than we want it to be, and on the other side very big external shocks which are causing a big loss of real income for people and businesses in this country.”
But what could such a grim economic forecast mean for households in Britain?
What a recession could mean for you and your money
A recession takes place when a country sees a significant decline in economic activity for an extended period of time.
Experts will declare a recession when a nation’s economy faces negative GDP, increased unemployment, dipping retail sales, and contracting measures of income.
However, Forbes said: “Recessions are considered an unavoidable part of the business cycle—or the regular cadence of expansion and contraction that occurs in a nation’s economy.”
Despite this tending to be unavoidable, the impacts of recession can pose detrimental risks to people’s livelihoods.
The UK might face a few unnerving realities following an economic downturn, including a heightened risk of job loss.
As this risk throws a lot of people into the same boat, finding a job replacement may also be much harder. This could even pose the prospect of losing your home or other properties.
Whereas those who manage to hold down their jobs might see pay cuts and reductions in benefits.
The Bank of England’s Monetary Policy Committee believes unemployment will rise as businesses start to struggle, forecasting a climb from 3.6 percent this year to around five percent in 2024.
However, recessions don’t just impact jobs, additional assets will be largely affected too, such as investments in stocks, bonds, estates, and other assets you might have.
This can have a knock-on effect on savings and pension plans, leaving you having to grapple with a stark reduction in funds.
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Business owners subsequently make fewer sales during a recession and could even be forced into bankruptcy.
With more people unable to pay their bills during a recession, lenders can often be seen tightening standards for mortgages, car loans and other types of financing; meaning you might need a better credit score of a larger down payment for a loan.
Recessions don’t last forever
Although the prospect of a recession can be worrying, the silver lining is that these don’t last forever – and there’s no guarantee the UK will see one.
Ed Conway, economics and data editor at Sky tweeted: “Now the dust has settled, trying to think of some positives re the BoE forecasts.
The “best” he could come up with include: “Their model may be wrong (certainly it’s more pessimistic than most).