Will there be a UK recession in 2023? What a recession will mean for you

After a tough year that included soaring costs across the board, many people have been hoping for some good news.

The cost of groceries and energy bills have remained high.

Mortgage rates have rocketed after many interest rate increases, including a sharper than expected hike to 5%, while inflation has remained stubbornly high. 

Some experts now believe the UK could be heading for a recession.

We’ll reveal what a recession is and the causes, what some experts say and how a recession could impact you.

Update: What does a UK recession in 2024 mean for your finances?

What is a recession?

A recession is when an economy contracts over six months (two consecutive quarters), as measured by the gross domestic product (GDP).

GDP measures the size and health of a country by looking at several factors such as household spending, government spending, investment as well as net exports.

What might cause a recession in the UK?

Many factors can cause a recession, but one is when borrowing costs rise quicker than expected. This has a huge impact on our finances, especially for aspiring and current homeowners.

Those needing a mortgage or are planning to remortgage soon face significantly higher costs if they’re looking for a fixed-rate deal, while rates on variable mortgages typically rise after a base rate increase.

The Bank of England (BoE) has hiked the base rate thirteen times, so it now stands at 5% in a bid to tackle high inflation – and more rate rises are expected this year to around 6%.

But higher borrowing costs are not the only risk to the UK economy.

As the cost of living crisis continues, people are struggling with expensive energy bills and groceries as inflation is not easing as quickly as anticipated.

Will there be another UK recession?

In the first quarter of this year, the UK economy grew by 0.1%. While the BoE and the International Monetary Fund have said the UK is not falling into a recession, some experts aren’t convinced.

Recent analysis from Bloomberg suggests that a year-long UK recession is expected to start in the fourth quarter of 2023 if the BoE raises the base rate to 5.75% by November.

The National Institute of Economic and Social Research (NIESR) believes inflation will likely stay above target for 2023 and 2024, which “raises the strong possibility of monetary policy having to induce a recession to attain price stability for the first time since the early 1990s.”

Unfortunately, Bloomberg Economics and NIESR are not the only ones gloomy about the economy.

“It is increasingly difficult to see how the UK avoids a recession as part of the process of bringing inflation down,” said Luke Bartholomew, senior economist at asset management company abrdn.

What would a recession mean for my money?

If a recession happens, it’s difficult to determine the actual impact on UK workers, but previous recessions can offer some insight.

Businesses may reduce their workforce to save money, which may already be an issue due to higher costs, while inflation is making everyday essentials more expensive and squeezing discretionary spending.

If you’re looking for a job, it might become more difficult and if you’re hoping for a pay rise to tackle rising costs, this could be tricky as company budgets are likely to be smaller.

While nothing is certain, paying down any expensive debt might be a good option (if you can).

Building an emergency cash fund is also wise, as this will help protect you if a UK recession happens.

You may have already built up a savings pot following the Covid-19 pandemic, if you were in a fortunate position, and this can help cushion any blow to your income.

It’s a good idea to speak to an independent financial adviser who can help you plan your finances, regardless of what the future holds.