UK back in recession - Why, and what next?

Last week it was announced that the UK has returned to technical recession.

The country has experienced two consecutive quarters of economic contraction, meaning that we have ‘double-dipped’.

The news has increased pressure on the government, which is still facing criticism over its most recent Budget announcement. But why has the UK double-dipped, and what does it mean for your business?

Why are we back in recession?

The UK was pushed back into recession by falls in construction and manufacturing output, both of which performed particularly poorly in the last quarter. But, while the double dip was precipitated by these sector-specific contractions, the return to recession illustrates more general weaknesses in the economy.

Opposition politicians suggest that the country has been forced back into recession in part because of the government’s austerity measures. They suggest that huge spending cuts have exacerbated the problem – and that, with some 80 per cent of the cuts still to come, the issue will only get worse. They insist that the way out of recession is to boost effective demand in the economy by investing in jobs.

Is this a depression?

There is no universally agreed definition, but economists generally consider a depression to be an extended and dramatic period of contraction. One popular definition is a recession lasting for more than two years – and by that measure we certainly are in a depression.

It is clear that we are in a very serious economic position; perhaps even that Europe is at a true crossroads. While the government has been keen to talk up the prospect of green shoots, the most significant issues remain: demand is very weak, businesses are unwilling to invest, and credit availability is severely impaired.

The problems have been compounded by the banking and sovereign debt crisis in Europe. Continental Europe remains the UK’s most important trading partner, and the significant weaknesses in key European economies are having serious knock-on effects for the UK.

What does this mean for me?

In some senses, the news that the UK has returned to technical recession will have little impact. For most business owners it is simply clarification of what they already knew: times are tough.

The news should refocus the minds of entrepreneurs across the country. Innovative, well-run firms can continue to survive and thrive even in this difficult climate – but this requires an agile approach to business management. Take the opportunity to review your finances. Wherever possible, try to identify ways in which you might be able to drive down costs. Consider contacting your suppliers with a view to renegotiating contracts. You should also do all you can to smooth your cashflow. If possible, try to negotiate more advantageous credit terms with your suppliers. Meanwhile, make sure that you chase invoices fastidiously and, where appropriate, consider running credit checks on potential customers.

You might also think about paying down your debts more quickly before interest rates rise. Recent figures from the Bank of England suggest that business owners and consumers are paying off debt at a record rate – but, while this might be sensible for some entrepreneurs, it is not necessarily the right course of action for everyone. Read more about paying down debt here.

What happens next?

This is clearly a very contentious question. For business owners and consumers, interest rates are amongst the key issues. The economic contraction has meant that analysts do not expect the base rate to rise until at least the beginning of 2014 – but, as mortgage borrowers have found out, this has not prevented increases in the rates charged by the banks.

There is now also a real possibility that the Bank of England could extend its programme of quantitative easing. Some commentators remain concerned that this could exert significant upward pressure on inflation.

More broadly, though, it seems that the permacrisis of 2011 may be set to return. Business owners need to expect the unexpected – but, above all, they need to remain calm. Despite the gloomy outlook, there remains space for innovative firms to thrive. Provided that you keep a close eye on costs and you are willing to remain flexible, there is no reason why your business can’t weather the storm.