Risk of UK recession is 'very, very high': Here's what that means for you

File photo dated 03/02/2022 of Chancellor Rishi Sunak who has said
Chancellor Rishi Sunak has been warned a recession is increasingly likely. (PA)

Britons have been warned they should brace themselves for a possible recession amid rising inflation and soaring energy bills.

The country is facing a living standards crisis with household finances struggling to cope with sharp increase in the cost of living.

Amrita Sen, director of research at Energy Aspects, believes the current risk of the UK tipping into recession is "very, very high".

"I think the risk of recession is very, very high because... this is not just oil and gas, it’s raw materials as fertilisers, food" she told MPs at a Treasury select committee. "We may not be able to say it [recession] yet, but it’s very, very high."

The British Chambers of Commerce has also said this month that the risk of recession is rising, while the National Institute of Economic and Social Research said it could happen in the second half of the year if energy prices remain at current levels.

Read more: Gas and oil could be rationed in the UK amid 'crazy' price increases, MPs warned

The Institute for Fiscal Studies has also warned 2022 could be worse than the financial crash of 2008/9, saying that a failure by chancellor Rishi Sunak to introduce urgent economic interventions to protect households could have a catastrophic impact.

Yahoo News UK lays out what a recession is, how it might affect you, and the factors potentially driving the UK towards one.

What is a recession?

A recession is defined as two consecutive quarters of negative economic growth in gross domestic product (GDP), which is the total value of all goods and services produced.

There are multiple things than can trigger a recession, including debt and inflation, and it's inflation that is triggering the main concern at the moment.

Retail shop spaces to let in the city centre is a sure sign that business is becomming more difficult in recent times as many have closed down due to financial difficulties as the British Retail Consortium announces that rising energy prices in the UK will result in shoppers being more cautious over the coming months as the cost of living crisis takes hold, including rising inflation, static wages and increasing prices for consumer goods on 23rd February 2022 in Birmingham, United Kingdom. With prices rising including mortgage and rent payments, tax, groceries and fuel, British consumers are set for a difficult year and will almost certainly have to tighten their purse strings. (photo by Mike Kemp/In Pictures via Getty Images)
A recession can cause businesses to fold amid rising costs of goods and reductions in demand as people have less money to spend. (Getty Images)

When inflation is high, in real terms, the value of each pound in your pocket is essentially decreasing – meaning consumers and businesses face higher prices, have less to spend, or may seek to save money instead of spend it.

That means there's a mismatch between how many goods and services people want to buy, how many products and services producers can offer, and the price of the goods and services sold, which prompts economic decline.

Read more: 'No historical parallel': Labour says Britons are facing worst ever cost of living pressures

A lack of growth can also deter investment, which aggravates the situation still further.

If a recession lasts a long time its known as a depression – with the US Great Depression of the 1920s/30s being one of the most well-known. It lasted for a decade and was triggered by the Wall Street stock market crash in 1929.

What could cause one now?

Rising inflation is running the risk of triggering a recession as basic essentials become more expensive.

Inflation is currently 5.5% – a 30-year high - with some forecasts projecting it could exceed 8% when new figures are released ahead of the chancellor's Spring Statement on 23 March.

Inflation is at its highest since May 1992. (Office for National Statistics)

Inflation, which is also being driven up by rising energy bills pushing up the cost of everyday items as businesses face higher costs to produce their products, can leave people cutting back on items they would usually buy but now are unable to afford.

All of this can create a decline in GDP, and therefore a recession.

How recessions impact people

Recessions have wide-reaching impacts on the average person's living standards.

As a result of rising costs and reduced demand, companies are more likely to cut jobs, make pay cuts, or reduce staff hours – all of which can trigger rising unemployment.

With the growing risk of job losses and rising cost of basic essentials, more people are likely to be unable to pay for key expenses like housing costs, food, energy bills, or clothing – prompting a rise in poverty.

And if workers or benefit claimants do not receive rises of their money in line with inflation, it's tantamount to a real terms pay cut.

Proportion of income after housing costs spend on energy bills
Houses on lower incomes were already spending a higher proportion of their income after housing costs on energy bills before soaring prices at the end of 2021. (Office for National Statistics/Joseph Rowntree Foundation)

There have been growing calls from experts, including the Resolution Foundation, to increase Universal Credit payments in line with current inflation in response to the growing cost-of-living crisis to protect those most vulnerable from rising prices.

Adam Corlett, principal economist at the think-tank, has also warned that the war in Ukraine will have a significant impact on the issue.

The UK relies on Russia for less than 5% of its gas, but prices are affected by fluctuations in global markets.

"Inflation may even exceed the peak seen during the early 1990s, and household incomes are set for falls not seen outside of recessions," he said.

Read more: Brits 'should be handed £500 cash payment' to help with household bills, urges economist

Richard Walker, managing director of supermarket Iceland, warned MPs this month that food inflation in particular could hit those "on the breadline" the most.

“Something as simple as milk has already had exceptional price rises... fortified milk was a quid just over a year ago, [it] is now £1.25," he said in parliament.

Food prices have soared in recent months. (Office for National Statistics)

"So when we talk about 5% inflation – like the CPI [consumer price index] said, or 8%, like this report says – actually, I think for food, it’s going to be at least 10%.

"And actually, for those on the breadline, for those on a budget, it’ll be even more."

Governments can respond to a recession by spending more, which is often accompanied by tax rises due to increasing the national debt - or austerity, which includes cuts to key public services, an approach most notably utilised in recent years by David Cameron and George Osborne.

Read more: 'Extraordinary' warning energy bills may go much higher than £3,000

Both options are unpopular, but austerity can have lethal consequences; in 2017, analysis from the British Medical Journal (BMJ) found austerity between 2010 to 2015 alone may have contributed to 57,550 extra deaths.

When was the last recession?

The last recession was during lockdown in 2020 at the beginning of the pandemic, which the UK exited in 2021.

The UK faced a 2.2% drop in GDP in the first quarter, and an eye-watering 20.4% drop in GDP in the second quarter breaking records.

The UK economy grew by 0.8% in January. Chart: ONS
UK gross domestic product (GDP) is estimated to have grown by 0.8% in January 2022 and is now above pre-coronavirus levels. (Office for National Statistics)

It was the biggest recession the UK has ever faced in terms of depth, and the worst recession since the Great Frost more than 300 years ago.

The UK faced the biggest fall of any G7 economy, but unlike any other recession in British history, it was triggered by lockdown measures.

The most recent recession prior to that was the 2008/09 financial crisis, with hundreds of thousands of businesses closing and an estimated 3.7 million people in the UK being made redundant.

Watch: Ukraine war: Why the price of a ban on Russian oil and gas would likely be a recession