Is Britain in a recession? How central banks make decisions and why it’s hard to say

Categories : International

(Luciano Rispoli, University of Surrey)

Surrey, Sept 28 (The Conversation) Last week, British Chancellor Quasi Quarteng launched the biggest tax cut in half a century to boost economic growth. The reason for this so-called mini-budget could be the Bank of England’s admission a day earlier that the UK could be in recession.

The fact that this statement from the UK central bank has been lost amid news of a declining pound and general volatility in financial markets comes as no surprise, as it is always difficult to determine whether the economy is actually in recession. landed or not?

On September 22, five of the nine members of the Bank of England’s Monetary Policy Committee (MPC) voted to raise the key rate by 0.5% to 2.25%. This is the rate that banks and lenders pay, which in turn affects the interest that people pay on mortgage and savings products.

It is now at the highest level since the global financial crisis of 2007-2008. The bank has worked steadily so far since its December 2021 meeting and expects more hikes to bring rising inflation back towards its 2% target.

UK base rate changes, 2013-2022

The MPC also publishes minutes of its meetings, which contain a warning that the recent UK economy is slipping into recession – or possibly already in recession. More precisely, the bank expects gross domestic product (GDP) to fall by 0.1% in the current quarter (Q3), well below its growth forecast of 0.4% in August.

More worryingly, this will be the second consecutive quarterly decline based on preliminary data released by the Office for National Statistics (ONS) for the second quarter of this year.

The lack of certainty on the part of the central bank points to the difficulty of recognizing and agreeing to a recession, as there is no universal definition. For example, Wikipedia was forced to suspend editing of its recession page in July when a change in definition sparked debate. The entry now reads: Although the definition of recession varies from country to country and among scientists, two consecutive quarters of decline in a country’s real gross domestic product (real GDP) is commonly used as a practical definition of recession.

Therefore, the general consensus seems to be that GDP data indicating a continued slowdown in economic activity should be interpreted as bad news, as the economy is believed to be contracting. It is usually associated with a decline in consumer spending, a decline in business confidence and a consequent rise in unemployment.

Certainly, any sign of recession generally causes banks and financial institutions to tighten their lending standards, making it more difficult to obtain mortgages and business financing. This has consequences for the housing market and small business activity.

Since economies do not usually return from recessions immediately, prolonged periods of sluggish economic activity can lead to long-term unemployment, affecting people’s prospects for future employment and income growth, especially of the younger generation and low-income families. This phenomenon is known as “employment scars”.

It is therefore not surprising that the Bank of England is already sounding the recession alarm bells before full confirmation. kind of fairy