Chancellor warns of significant recession

May 19, 2020 / News & General

The Chancellor of the Exchequer, Rishi Sunak, has revealed that it is very likely the UK is currently experiencing a significant recession. This comes as figures show the economy is contracting at the fastest pace since the financial crisis of 2008.

The UK economy shrank by 2% in the first three months of 2020, a direct effect of the coronavirus pandemic forcing the country into strict lockdown measures.

The economy was pushed into decline only a couple of days after lockdown began. Now economists are expecting an even bigger slump in the current quarter.

Mr Sunak said: “It is now very likely that the UK economy will face a significant recession this year, and we’re already in the middle of that as we speak.”

“Technically a recession is defined as two quarters of negative GDP, we’ve now had one…so yes, it is now very likely that the UK is facing a significant recession at the moment and this year.”

Despite some industries being affected more than others, research shows that nearly all sectors have experienced a shrinkage with widespread declines across the services, manufacturing and construction sectors. This includes a record 1.9% fall in services output, which includes retailers, travel agents and hotels.

Household spending is also down at its fastest pace in more than 11 years as restaurants, bars, shops and cafes remain closed.

The Office for Budget Responsibility has estimated the UK GDP could fall by 35% in the second quarter of this year and it expects unemployment to rise by more than two million to 10%. This would push the Government deficit to £237 billion in 2020 to 2021.

How does a recession affect businesses?

The impacts of a recession on businesses, even a relatively short one, can often last for years. In a recession people spend less, so lots of companies see their revenues and profits fall. This means they need to change the way they operate in order to address their cash flow issues. Also, businesses won’t have easy access to credit because banks and other lenders become very cautious with their lending. 

Often a recession will lead to an increase in the number of companies going into formal insolvency. So, it’s always a worrying time for business owners when the term ‘recession’ starts being used. The government is trying to help, by implementing measures to assist businesses – such as the Job Retention Scheme and the Bounce Back Loans for small businesses.

Before the coronavirus pandemic arrived, a lot of companies were already struggling – especially in the retail and restaurant sectors. The effect of the current slowdown has meant that some companies have already had to put their company through an insolvency process – e.g. a Creditors’ Voluntary Liquidation (CVL) or Administration.

When you add Brexit to the current situation, you can see why so many business owners and financial experts are pessimistic about the future.

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