THE UK economy will officially enter recession by the end of the month, the Bank of England has warned.
Britain’s central bank has raised interest rates by 0.5 per cent to 2.25 per cent from 1.75 per cent, the highest level since late 2008.
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The move will make the cost of borrowing, including loans, credit cards and mortgage repayments more expensive.
And it means more misery for households who are already grappling with a cost of living crisis.
A country is in recession when its economy shrinks over a sustained period of time, rather than growing normally.
A slowdown in retail spending and manufacturing output has prompted the Bank of England to say that it expected UK GDP to have fallen by 0.1 per cent in the three months to the end of August – indicating the country is already in recession.
This is below its projections of a 0.4 per cent growth and marks a second successive quarterly decline.
It said there had been a smaller-than-expected bounce back from the Jubilee bank holiday and warned there would be an economic hit from the extra holiday for the Queen’s state funeral.
It takes two quarters of shrinking growth for economists to qualify a downturn as recession.
The Bank of England now expects inflation to peak at 11 per cent this October, compared to its earlier forecast of 13.3 per cent in August.
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It still expects high levels of inflation to last for the next few months.
The Bank said that the government’s relief on power bills meant energy costs would be less of a driver of inflation than before – but a shortage of workers and higher wages was having a bigger impact.
This means that domestic issues, including more British companies hiking prices for consumers, are now the biggest cause of inflation rather than just the energy crisis.
What happens in a recession?
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.
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.
This is something we are seeing in the current cost of living crisis with everything from energy bills, petrol 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 MoneySavingExpert.com 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.
