What is a recession and what does it mean?

THE UK has fallen into recession for the first time since the financial crisis 11 years ago.

The recession was made official this morning after the economy slumped by a record 20.4 per cent in just three months.

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The Office For National Statistics – which measures the UK's GDP – said: "It is clear that the UK is in the largest recession on record."

Economists have been warning that we could be heading for a global recession due to coronavirus for some time.

Here we explain what the term means, how a recession is caused, and how it could impact your finances.

What is a recession?

A country is in recession when its economy shrinks over a sustained period of time, rather than growing normally.

It is calculated using something called Gross Domestic Product (GDP), which in the UK is the value of all the goods and services added up in pounds.

Generally speaking, if the GDP has fallen over two quarters (or six months), a country is said to be in recession.

Recessions are bad news, because they usually lead to unemployment and wage stagnation.

This in turn means the government gets less tax, which could mean cuts to services and benefits, or that rates go up.

What causes a country to go into a recession?

There are lots of different factors that can cause a country to tip into a recession.

The current crisis is a result of the coronavirus pandemic and subsequent lockdown measures.

The ONS said that there have been record falls in services, production and construction, which have been particularly prevalent in those industries that have been most exposed to government restrictions.

How to recession proof your finances

IF you're worried about the recession hitting your finances then we explain how to protect yourself.

CHECK YOUR FINANCES Take a look at where you can cut costs. Are there any subscriptions you could cancel? Could you haggle down a bill? Reassess your finances and work out where to save cash and then save this money into a rainy day fund.

PAY OFF YOUR DEBTS Make sure you're repaying priority debts and if you're struggling speak to your lender. Use a tool such as MoneySavingExpert.com's eligibility checkers to check which cards and loans you're likely to be accepted for without it hurting your credit score. You can get FREE debt advice from places like Citizens Advice and StepChange.

DIVERSIFY YOUR PENSIONS AND INVESTMENTS If you've got a pension or investments make sure your pots are well diversified. Being overexposed to one asset class or one particular company could put your savings at risk if something goes wrong.

Other recessions have been triggered by a variety of causes including war, harvest failures, deflation, oil embargoes, credit squeezes and the subprime mortgage crisis.

Economists often disagree on the precise causes of any given recession so it can be hard to understand exactly what has made any country's economy contract.

When was the UK last in recession?

The last time the UK fell into recession was in 2008/9, following the banking crisis and financial crash.

While the peak was in 2008, the recession lasted for five quarters (or 15 months) in total with high unemployment throughout.

Last week the Bank of England forecast that the economy might not bounce back until the end of next year and warned unemployment could rise sharply.

Recent recessions in the UK

Other UK recessions in the past century include:

  • The end of World War 1: 1919-1921
  • The Great Depression: 1930-1933
  • Stagflation and oil price shock: 1973-1975
  • Tightening of fiscal policy: 1980-1982
  • House price crash: 1990-1992
  • Banking crisis: 2008-2009

What's the difference between a recession and a depression?

A depression is just another term for a recession that goes on for a long time, or that is particularly bad.

With the ONS describing this recession as the worst on record, it is possible that it could also become known as a depression.

According to the Mirriam-Webster dictionary the effects of a depression are much more severe than a recession – characterised by widespread unemployment and major pauses in economic activity.

It also adds that recessions can be more localised while depressions can have global reach.

UK economy officially enters recession – how it will affect your finances.

Earlier this week, the Chartered Institute of Personnel and Development (CIPD) warned that one in three business is planning to cut jobs.

How to recession proof your finances as inflation plummets and BoE considers negative interest rates.

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