So we’ve been hearing the word recession thrown around a lot lately!
We have been aware of the economic downturn since March. So why has it only recently been officially declared by the U.K. government?
It’s because a country is considered to be in recession officially only after two consecutive quarters of it’s GDP growth has been in contraction.
The 1st quarter of 2020 the economy in U.K. showed a 2.2% contraction to the previous quarter, while Q2 contracted a further 20.4%
This is when governments try to implement policies to try to navigate the situation and reduce the negative impacts as much as possible.
Monetary & Fiscal Policy
Monetary Policy
This is when the government tries to control the economy by moving key indicators such as interest rates. For the first time in years the interest rate in the U.K. reduced so much soon it could become negative.
Two of the main monetary policies implemented by the U.K. have been to reduce the interest rates and to increase the central bank’s holding of UK government bonds and non-financial corporate bonds
The Bank if England has been pumping money into the financial system through its quantitative easing (QE) programme, but to little effect.
The Bank of England usually lowers interest rates when it wants people to spend more and save less.
It cut them to a low of 0.2% in March to try to stimulate the economy amid the coronovirus pandemic.
In theory, taking interest rates below zero should have the same effect. But in practice, it's a bit more complicated.
After all, why would anyone pay to stash money in a savings account or lend someone money, when they can keep the cash at home for free?
Fiscal Policy
Tax cuts and public spending increases are some of the main policies implemented when it comes to Fiscal policies. Here are some of the ones implemented by the U.K. governmen.
Tax and spending measures to support households and families during the health emergency include:
- (i) additional funding for the NHS, public services and charities (£48.5 billion);
- (ii) measures to support businesses (£29 billion), including property tax holidays, direct grants for small firms and firms in the most-affected sectors, and compensation for sick pay leave; and
- (iii) strengthening the social safety net to support vulnerable people (by £8 billion) by increasing payments under the Universal Credit scheme as well as expanding other benefits.
These measures do feel like a temporary fix with aids such as the furlough coming to an end in October and Brexit to officially hit at the end of 2020.
Let’s hope the contracted GDP doesn’t go on for 8 consecutive quarters as that is what is referred to as a Depression!
Did you know this? How has the recession affected you? What are your thoughts on what the future lies?