United Kingdom likely to see longest recession since records began, Bank of England says

A dire forecast for one of the world’s largest economies suggests it is already in a recession that could outlast all others since records began.

The United Kingdom, the world’s fifth largest economy, is probably already in a recession and it could end up being the longest the country has seen since records began.

Britain’s economy might not grow again until 2024.

That was the dire economic outlook from the country’s central bank as it ratcheted interest rates up by three quarters of a basis point to 3 per cent on Thursday.

It came the day after the United States’ Federal Reserve also hiked interest rates by 0.75 percentage points.

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The Bank of England hiked interest rates on Thursday. PHOTO: ANTHONY DEVLIN/ZUMA PRESS

Like many countries, the UK is struggling with cost of living rises associated with the Covid shock to the economy and energy issues exacerbated by Russia’s war in Ukraine. But Britain has also had to contend with uncertainty caused by its chaotic exit from the European Union and the more recent political chaos in Downing Street, with a revolving door of prime ministers.

The Bank has pointed to the recent axed mini budget, set out by similarly axed former prime minister Liz Truss, compounded the economic damage.

The economy will be a chief area of concern for Rishi Sunak, this month’s British PM.

Some commentators have said the recession may mean Mr Sunak will try to put off an election until the current government’s full term ends in 2024 rather than risk going to the polls in a downturn.

Downing Street said Mr Sunak knew it was a “worrying time” for Britons and “difficult choices” would have to be made in regards to spending.

“The number one priority for his Government is bringing down inflation,” it said in a statement.

Britain's new Prime Minister Rishi Sunak will have to roll up his sleeves and deal with the economy. (Photo by Leon NEAL / various sources / AFP)

On Thursday afternoon, the Bank of England – the UK’s central bank – lifted interest rates from 2.25 per cent to 3 per cent, a 0.75 per cent hike not seen since 1989.

There are warnings rates could rise as high as 5 per cent.

That will mean higher rates for savers but higher outgoings for those with mortgages and other debts.

The bank also said Britain was facing a two-year, “very challenging” recession, which likely won’t end until mid-2024.

Unemployment in the UK is also expected to almost double from the current 3.5 per cent to 6.5 per cent.

The Bank of England has warned the possible trajectory of this recession (dashed line and solid line above) could see the UK’s longest ever recession; lasting into 2024. Picture: BOE.

Longest recession since records began

“The (Bank of England’s monetary policy committee’s) latest projections described a very challenging outlook for the UK economy,” the bank said.

“It was expected to be in recession for a prolonged period and consumer price index inflation would remain elevated at over 10 per cent in the near term.”

The bank said it was likely the UK has already entered a recession in the third quarter of this year due to rising costs, particularly on energy bills.

A recession is generally defined as two consecutive quarters in which the economy contracts.

The good news in the gloom for Brits is the Bank of England has projected the downturn in the UK will be relatively shallow. Output might go down by around 2-3 per cent, compared to a fall of more than 6 per cent in the 2008 credit crunch recession.

But the bad news is it could be the longest recession since records began in the 1920s, said the bank.

Inflation as also expect to hit 11 per cent in the current quarter

Unemployment could double. Picture: BOE.

Bank of England Governor Andrew Bailey was asked by reporters if it was fair to raise interest rates as costs were rising too, all of which would impact household budgets. But he said inflation had to be tackled.

“If we do not act forcefully now it will be worse later on.”

Jeremy Hunt, Britain’s finance minister, concurred.

“Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country.

“That is why this government’s number one priority is to grip inflation, and today the bank has taken action in line with their objective to return inflation to target.”

A spokeswoman for PM Sunak said he recognised it “will be a worrying and difficult time for people, families and businesses across the UK.”

“The number one priority for his Government is bringing down inflation. There will be some difficult choices, but we will ensure that we are actually fairly, protecting the most vulnerable and continuing to seek long term growth.”

Britain’s economy of US$3.2 trillion (A$5.1tn) is overall the world’s fifth largest in terms of gross domestic product behind only the US, China, Japan and Germany and just ahead of India, France and Italy.

Its economy is roughly twice as large as Australia’s, which is US$1.7 trillion (A$2.7tn).

Any shrinking of the UK economy could have an outsizes effect on other nations. This could include Brits dialling back on discretionary spending such as trips abroad.