GDP: What is it and how does it impact the cost of living?

·3 min read
The Bank of England announced an increase to interest rates, a projected rise in inflation and a likely five-quarter recession on Thursday (Dominic Lipinski/PA) (PA Wire)
The Bank of England announced an increase to interest rates, a projected rise in inflation and a likely five-quarter recession on Thursday (Dominic Lipinski/PA) (PA Wire)

Last week, the Bank of England warned that the UK economy will enter its longest recession since the global financial crisis in the fourth quarter, leaving GDP 2.1 percent lower.

Meanwhile, inflation is expected to peak above 13 percent in October.

In a research note shared on Monday, Saxo Bank’s head of macro analysis, Christopher Dembik, said that the UK is ”more and more looking like an emerging market country”.

The only factor missing, he said, is a currency crisis, as the UK’s pound is still holding firm, reports CNBC.

But, what exactly is GDP, when is the next announcement, and how does it impact spending and the cost of living?

Here’s everything you need to know.

What is Gross Domestic Product (GDP)?

GDP stands for gross domestic product and is a measure of the size and health of a country’s economy over a period of time (usually one quarter or one year). It is also used to compare the size of different economies at different points in time.

Goods are things such as a new washing machine, or milk that’s bought in the supermarket. Services include a haircut from a hairdresser or repairs done to your home by your plumber.

However, explains that it’s only the final goods and services that are sold that matter for overall GDP.

For example, if tyers roll off a production line, and are sold to a car manufacturer, the value of the tyers isn’t included in GDP, it’s reflected in the value of the car.

The more you pay, or the market value of that good or service, is what’s important, as these amounts are added together, in order to get overall GDP.

When GDP goes up, the economy is growing, meaning people are spending more and businesses are expanding. For this reason, GDP growth, which is also called economic growth, or simply “growth” - is a key measure of the overall strength of an economy.

What does it mean for spending and the cost of living crisis?

On September 5, a new prime minister will be announced after Boris Johnson’s resignation, with the country is in the midst of a cost-of-living crisis, as well as the steepest fall in living standards on record.

The UK’s energy price cap is set to rise by an unprecedented 70 percent in October, pushing energy bills above £3,400 per year, and driving millions of households into poverty, reports CNBC.

Furthermore, the country is currently battling trade disruptions due to Brexit and the impacts of Covid.

The Bank of England has also projected that real household post-tax disposable income will fall 3.7 per cent across 2022 and 2023, with low-income households hit the hardest.

Research by the IMF has also shown that the UK’s poorest households are among the hardest hit in Europe by the cost-of-living spike.

“This is the lowest level since the end of the 1970s. The recession will be long and deep. There won’t be an easy escape. This is most worrying, in our view. The Bank of England assesses the slump will last with GDP still 1.75% below today’s levels in mid-2025,” Dembik said.

“What Brexit has not done by itself, Brexit coupled with Covid and high inflation have succeeded in doing. The U.K. economy is crushed.”