Britain’s economy is increasingly at risk of sliding into a summer recession amid the biggest squeeze on household incomes since the mid-1950s, as soaring inflation reduces consumers’ purchasing power, said the forecasters.
Economists have said the double whammy of slowing post-lockdown growth and rising living costs following Russia’s invasion of Ukraine could lead to a decline in gross domestic product (GDP) for two years. consecutive quarters, which is the definition of a recession.
After weaker-than-expected growth in February and the inflation rate hitting the highest levels since 1992 last month, City forecasters said Britain’s GDP was now on track to grow by around 1 % in the first quarter of 2022 before slipping into reverse this summer.
Analysts said activity would be curtailed by an additional bank holiday for the Queen’s Platinum Jubilee in June, as public holidays typically lead to lower overall economic output. A return to lower activity rates in the health sector after a winter rush to vaccinate people against Covid-19, as well as moderation in household spending in the face of soaring living costs, are also expected. weigh on growth.
James Smith, an economist at Dutch bank ING, said the economy was likely to contract in the second quarter. The bank forecast a contraction of 0.3% in the three months to the end of June, followed by growth of just 0.2% in the third quarter.
“It will be quite close to a technical recession. Even if one is avoided, we’ll still see pretty unexciting growth numbers,” Smith said.
“If people spend more money on energy, one would expect the sales volume of some non-essential products to decrease. That’s what we’re going to monitor,” he added.
Office for National Statistics figures due Friday this week are expected to show retail sales falling in March as households tighten their belts. It comes as retail industry bosses warn of slowing sales amid rising costs of living.
Neil Shearing, chief economist at consultancy group Capital Economics, said household disposable income is expected to fall by around 1.9% this year. That’s bigger than the 1.8% drop in real incomes recorded in 1977, and the biggest since modern records began in the 1950s.
“In comparison, real incomes fell ‘just’ 1.5% in 2011 following the global financial crisis,” he said. “With the economy already close to stagnation, it clearly wouldn’t take much to produce a month or two of declining output.”
The warnings come after International Monetary Fund chief Kristalina Georgieva said global growth will slow this year and next as Covid shockwaves and war in Ukraine keep inflation higher for longer than expected. .
The strength of the UK economy will depend to some extent on continued spending by households who have been saving during the pandemic. However, while nearly £250billion was accrued during the lockdown, most of that sum was concentrated among the wealthiest families able to continue working from home, meaning those most at risk of the skyrocketing cost of living will feel the greatest pinch.
Thomas Pugh, an economist at accountancy firm RSM UK, said he expected households would likely need to dip into their savings or take on debt to hedge against rising inflation.
“This is one of the main reasons why we believe the UK will avoid a recession this year. However, our forecast suggests that GDP growth will only average 0.1% in each of the last three quarters of this year – so it wouldn’t take much of a rise in oil prices or disruption to supply chains to push the UK into recession,” he said.