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Chances of a Recession are 50/50
Britain could be heading for a recession after all - despite hopes the threat had been averted in March this year.
News from the Bank of England that there’s a 50/50 chance of a recession by the middle of 2024 has led to further speculation about when the current economic crisis will end.
Bank chiefs meet every six weeks to decide whether the base rate needs to change. The Monetary Policy Committee kept interest rates at 5.25% for a second consecutive time when it met on 2nd November. This is the highest level since the financial crisis of 2008.
The instabilities created by war in the Middle East and domestic inflation pressures are keeping borrowing costs high - with the chances of economic growth in the UK worsening.
Is the UK in recession?
The possibility of a UK recession has increased again in recent months, with the outlook becoming gloomier.
In March, data suggested the UK had narrowly escaped a recession. However, at the time, Chancellor Jeremy Hunt said we weren’t “out of the woods” yet.
Following the latest assessment earlier this month, the Bank of England has now warned the economy will be on the “brink of recession” in 2024. It says interest rates will remain high for an extended period to tackle continued inflationary pressure.
Andrew Bailey, the Bank of England’s governor, said it was “much too early” to think about rate cuts yet. He says the higher interest rates are working, with inflation falling to 6.6% from its all-time high of 11.1% one year ago.
However, he says it must fall to the Bank’s 2% target - and in the interim, the Monetary Policy Committee will be “watching closely” to see if the interest rate needs to increase again.
The technical definition of a recession is when the economy shrinks for two consecutive quarters, based on the government’s Gross Domestic Product measurement.
The GDP had decreased by 0.6% in July 2023 and the UK seemed to be teetering on the brink of a recession. However, it grew by 0.2% in August and the UK narrowly escaped again, as it had in the final quarter of 2022.
Experts divided over recession threat
Economic experts are divided on whether the UK will fall into a recession. The National Institute of Economic and Social Research suggests inflation won’t be on target by the end of 2023 and will remain high into 2024. It suggests there’s a “strong possibility” of the UK’s monetary policy inducing a recession to achieve price stability.
The NIESR isn’t the only organisation feeling gloomy about the economy: Luke Bartholomew, senior economist at Abrdn (formerly Standard Life Aberdeen plc) asset management company, says it is “increasingly difficult” to see how a recession can be avoided.
However, Chancellor Jeremy Hunt says the UK is proving “more resilient” than many people expected, while the Bank of England still expects to reach its 2% inflation target by the end of 2025.
What happens in a recession?
With finances already being an issue due to higher costs, businesses may have to reduce their workforce to save money. Inflation is making everything more expensive, including everyday essential items, so laying off staff may be the only option for some cash-strapped SMEs.
With company budgets likely to be smaller, people looking for work might also find it more difficult.
Business owners are advised to create an emergency cash fund if possible as a financial buffer, should a recession happen. However, this might be difficult when times are already hard.
Financial experts also advise businesses to pay off as many of their loans as possible - which could also be tricky considering the current economic climate.
Seeking independent financial advice from small business accountants can help SMEs make the most of their budget, whatever the future holds. Accountants are the number one source of advice for companies with less than 250 employees, according to the Small Business Matters report by the Institute of Chartered Accountants in England and Wales.