According to the Bank of England, a recession is coming and it will be protracted, lasting more than a year.
The economy is not expected to contract as quickly or as much as it did during the 2008 financial crisis, but inflation – the rate of price increases – is expected to remain high into 2023. It will lower the standard of living the most. According to central bank records.
Borrowing is now more expensive as the Bank of England raised interest rates to 1.75 percent on Thursday. And the currency’s purchasing power is being eroded by inflation, which they expect to exceed 13 percent by the end of the year.
How bad would that be?
Looking at how long inflation will last is more helpful than just looking at its potential peak when trying to gauge how bad things can happen to the economy.
Not only has the central bank predicted that inflation will be above 13 percent, but also that it will remain at 9 percent by this time next year.
This would result in a 3.7 percent fall in real disposable household income in 2022 and 2023 – the money people are left with after paying for basic necessities.
According to the Bank of England, without government intervention to protect households from high prices, the economy could shrink by up to 2.1 percent. This is similar to the contraction of the 1990s and early 1980s.
Inflation is being driven not only by higher energy prices – partly due to the Russian war in Ukraine, which has caused the country to scale back gas supplies to Europe – but also by increased costs in the economy.
Energy goes into the production of many goods and services, so rising energy costs have a huge impact on prices and directly on energy bills.
But the UK also has very low unemployment by historical standards and very few workers are able to meet business needs.
That means competition for employees has forced companies to offer higher salaries, which can increase their overall costs and then factor into the prices they charge their customers.
Rising costs in a declining economy can lead to stagflation if these factors lead to high unemployment.
Who will feel the greatest pain?
A key driver for predicting this recession is that people are likely to buy fewer goods and services because they can barely afford them.
It can reduce demand in the economy, weaken the labor market and increase unemployment.
For those with jobs, persistently high inflation will be particularly painful for those with low fixed incomes.
These groups, which may include poor retirees and beneficiaries, are often hardest hit by the impact of rising prices. You can mostly only buy the bare essentials and have to buy them even though they are becoming more and more expensive and have little or no savings.
Benefits are set to grow in line with inflation, but there’s a lag between the snapshot of price increases used by the government and the increase in cash people receive.
This six-month hiatus means people are currently facing below-inflation inflation, earnings growth and support falling. Activists have urged the government to close the gap as inflation has soared in recent months.
money in and money out
In the face of macroeconomic forces, there is not always much one human can do. But with bills sure to be high in the coming months, this is a great time to sit down and take a look at your finances.
Look at the money coming in each month or week, and then compare it to the expenses. Then assume that one in ten of those pounds is lost and try to estimate what seems affordable on that basis.
If you’re in debt, seek advice from charities like National Dateline or StepChange because it’s important to pay off the most expensive debt first, if possible. This is not always obvious at first glance.
If you need advice on a specific bill or benefit, Citizens Advice, another non-profit organization, may be able to help.
high interest rates
Higher interest rates make loans more expensive. Tracker mortgages, or standard adjustable-rate mortgages — as opposed to fixed-rate mortgages — will go up, and personal loan interest rates may also be higher.
A typical tracker mortgage would have to pay around £50 more per month. Those with a standard adjustable rate mortgage will see an increase of nearly £60. A number of online calculators can help you determine the impact based on your unique circumstances.
For tenants, this can mean that a landlord passes on the additional costs of a mortgage through a rent increase.
Forecasts of how high the central bank’s interest rate could rise vary, but some economists believe it could rise to 3.5 percent over the next two years. Others believe it could get closer to the current level of 1.75 percent.
It may not be tempting to set aside extra cash at this point, as its purchasing power erodes over time. However, saving now can help ease spending in the winter and in the years to come as prices rise.
dismissal and unemployment
Businesses are more likely to downsize or find new jobs difficult during recessions.
Businesses also face higher borrowing costs and higher energy and production costs. This will make it more difficult for them to hire new employees in the coming months.
But because an aging population and a shrinking labor pool means unemployment may not rise as much now in the recession as it has in previous recessions.
The Bank of England has forecast unemployment could top 6 per cent by mid-2025, compared to the current 3.8 per cent.
In 1992, during the recession of the early 1990s, unemployment reached 10.7 percent.