The recession is over. The UK saw the best economic growth on record. But times are still hard, and the economy is not actually doing that well.
How can all these things be true at the same time, and why does it matter?
In normal times, a country’s economy grows.
Its citizens, on average, become slightly richer as the value of the goods and services it produces – its
Gross Domestic Product (GDP) – increases.
But sometimes their value falls, and a recession is usually defined as when this happens for two three-month periods – or quarters – in a row. It’s a sign the economy is doing badly.
The first two quarters of 2020 saw GDP falling sharply, making it the worst recession on record, and the first in the UK since 2009.
For most people, economic growth is good.
It usually means there are more jobs, and companies are more profitable and can pay employees and shareholders more.
A growing economy also gives the government more money in taxes. So it can cut taxes, or spend more on benefits, public services and government workers’ wages.
When the economy shrinks, all these things go into reverse.
The third quarter of 2020 saw the UK economy growing again, meaning that technically the recession was over.
July to September saw the fastest three-month growth on record – 15.5% – which would be extraordinary in normal times.
But what the figures capture is an economy shutting down and reopening again. Shops and restaurants closed in the spring during the nationwide shutdown, and reopened in the summer.
People started going out, taking holidays and getting back to some of their normal lives. They spent more money, bringing the amount of economic activity closer to where it was last year.
However there is still a big gap between how the economy was doing last year, and where it stands today. Though the recession was over, the economy was 9.7% smaller than it was before the pandemic.
That reflects the fact that hundreds of thousands of people have lost their jobs, and millions are still on furlough, with the government paying most of their wages.
Many businesses still have far less trade than before the pandemic.
It takes a while for statisticians to calculate the size of the economy, so their figures always describe the recent past, not what’s happening today.
The latest figures run to the end of September, before wide-ranging new lockdowns were introduced around the UK.
However, the recovery’s pace was already slowing down in September.
When figures for the October to December quarter are published, they may well show GDP falling again as England’s nationwide lockdown and measures in other nations hit the economy.
If the following quarter also sees a fall, then that would be a second recession, or what is sometimes called a “double-dip” recession, where two recessions happen close together.
However, Bank of England forecasts expect to see growth next year. And if an effective vaccine becomes widely available, that would strongly boost the recovery.
The UK has been doing worse than other major worldwide economies. The UK economy is 9.7% smaller than it was before the crisis began, but the US is only 3.5% smaller. France is 4.1% down, Germany is 4.2% down, and Spain is 9.1% down.
The UK’s poor performance compared with other countries is partly down to a longer lockdown, experts believe.
The world economy will shrink by 4.4% in total this year, according to International Monetary Fund forecasts. This is less bad than the Fund expected three months ago, as the recession was less severe than they expected.
Some people may lose their jobs, or find it harder to get promotions, or a pay rise.
Graduates and school leavers could find a first job harder to get.
However, the pain of a recession is typically not felt equally across society, and inequality can increase.
For instance, many UK homeowners who kept their jobs during the last recession did OK. Mortgage interest payments for many fell considerably, leaving them with more spending money.
Others, such as benefit recipients or public sector workers, did less well.
In the UK, the last recession, caused by the global financial crisis, lasted five quarters – from the second quarter of 2008 onwards.
Unemployment rose sharply, but began to fall back again two years later.
And there was a massive deficit – the gap between what the government raises in taxes and what it spends on public services.
This resulted in a near-doubling of the national debt, and a decade-long programme of austerity. There were steep cuts in many areas of government spending, except health, education and international aid.
The 2020 recession has caused the government to run an even bigger deficit, and national debt has also grown rapidly during the period.
An effective vaccine would give the recovery the biggest possible boost.
In the meantime, the UK government and others around the world are borrowing huge sums to pay for schemes to protect jobs, support businesses and combat the virus.
The Bank of England is also supporting the economy by through quantitative easing, where it tries to encourage individuals and businesses to invest and spend more.