Is Britain in a recession? How central banks make decisions and why it’s hard to say
Last week, British Chancellor Quasi Quarteng launched the largest 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.
surrey. (The Conversation) Last week, British Chancellor Quasi Quarteng launched the largest 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?
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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.
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UK base rate changes, 2013-2022 The MPC also publishes minutes of its meetings, which include a warning that the UK economy has recently entered – or may already be 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. Even 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 cause. For example, Wikipedia was forced to suspend editing of its recession page in July, when debate erupted over the definition change. The entry now reads: While 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 often used as a practical measure 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 typically return from recessions immediately, prolonged periods of sluggish economic activity can lead to long-term unemployment, affecting people’s prospects for future employment and earnings 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.
Well, with some sort of circular agreement, measuring the state of the economy — that is, deciding whether a country is in recession or expansion — isn’t as easy as you might imagine. First, the data or estimates released by the Bank of England, the ONS and generally other institutions around the world are “provisional” – especially when first published for the relevant quarter. This means that this data can be changed later. For example, data available in September 2022 (the last month of the third quarter) may indicate that the economy contracted in the third quarter.
However, as more information is gathered on third quarter performance, this negative growth signal could be zero or even positive in October or November 2022. This is called “real-time data uncertainty” and is one of the challenges policymakers face when making “real-time” decisions. In other words, central banks make decisions about the state of the economy based on their understanding of the “noise” that arises. Second, as US Treasury Secretary Janet Yellen also recently noted, strong labor market conditions and negative growth related to spending should not be bad news for the economy. What they mean here is that GDP should not be the only indicator on which to base economic assessments – a wide range of indicators can often paint a different picture. Outlook for UK growth So what is the Bank of England’s current assessment of the state of the UK economy? The statement from the most recent meeting read: “The expected slowdown in underlying growth in the third quarter of 2022 was in line with the weakness reported in the latest company surveys.”
These company surveys point to zero near-term growth, while a key indicator of expected business activity (the purchasing managers index’s total expectation chain) declined between June and August 2022. The bank also said that weak manufacturing output growth (due to supply chain disruptions) and weak demand are negatively impacting the economy.
Meanwhile, corporate investment plans have been reported as weak, with companies citing uncertainty about demand and the macroeconomic outlook, as well as rising costs, as the main drivers of the decline in investment. So the Bank of England paints a picture using a number of indicators to show the contracting economy. In this context, the bank has said it will closely monitor upcoming data as well as the development of Quarteng’s growth plan policy, scheduled for September 23. He hopes this can give a boost to the deteriorating economy.
Disclaimer:Prabhasakshi has not edited this news. This news is published from PTI language feed.