There has been a lot of tension recently around the current slump taking place in the UK economy. People are keen to understand how this will affect them and how long the situation might last. Let’s break down the current situation and explore how it could affect you.
The current state of the UK economy
The economy of the UK shrank in August, with the Office of National Statistics reporting that GDP was down by 0.3%. Economists have been warning that a recession is likely. This was the first month a decline took place since early 2021, when the country was still reeling from lockdown pressures.
The ONS also reports that the economy has slowed continuously in the underlying three-month on three-month period. GDP lowered between May-August compared to the three months that led up to May.
Two sectors that took a particular hit in August 2022 were the consumer-facing services sector and the production sector.
Though consumer-facing services grew by 0.7% in July, the following month saw it fall by 1.8%. The biggest contributors were the sports activities and amusement and recreation activities areas.
The production sector also fell at this time. It was down by 1.8% in August 2022, down for its third consecutive month. Manufacturing contributed to this the most, down by 1.6%. Falls in basic pharmaceutical products, transport equipment and metal products contributed the most.
Why is the cost of living rising?
The cost of living is rising in the UK at its fastest rate in 40 years due to Inflation. Inflation stands at 10.1% currently. The demand for many products is now higher than supply, so prices have been put up across many products.
The Bank of England has been trying to bring inflation back down to a target of 2%. To do this, they have increased interest rates. This has a positive effect on savings accounts, as interest rates are increased to encourage people to save more and spend less.
For credit cards, loans and mortgages, however, rising interest rates have a less desirable effect on consumers.
What does a weak pound mean for your money?
The UK’s borrowing costs recently have caused the UK’s currency to weaken, dulling the demand for UK currency to buy stocks and shares. It has fallen to a level against the US dollar that hasn’t been witnessed since 1985.
The pound has always been a popular currency to trade on the foreign exchange market, so traders have been keeping an eye on the current situation.
The market has been very unstable. This indicates a lack of confidence from investors in the new British government’s ideas about how to stabilise the economy.
The drop in the pound’s value affects consumers as well as investors. When paying for goods and services that are imported from overseas (such as oil), they will find their money no longer stretches as far.
Over half of the UK’s food is imported, so this is why you may notice higher prices than usual when doing the weekly grocery shop.
The Bank of England has predicted that a recession could continue for at least five quarters. It looks everyone will be keeping a close eye on the state of the British economy in 2023.
