Today’s big question

Will Britain fall into a recession this summer?

Spiralling cost of living comes after the Russian invasion of Ukraine

Concerns are growing that Britain might slip into a recession amid slow post-lockdown growth and squeezed household incomes.

Economists have warned that the “double blow” of slowing growth and sky-rocketing living costs after the Russian invasion of Ukraine could see a fall in gross domestic product (GDP) for two consecutive quarters, “the definition of a recession”, reported The Guardian

Thanks to “weaker than expected” growth in February, and inflation reaching its “highest levels since 1992” in April, forecasters have predicted that UK GDP is “on track” to grow by about 1% in the first quarter of 2022, “before slipping into reverse this summer”, said the paper. The economy is likely to shrink in the second quarter, before growing by just 0.2% in the third quarter, according to James Smith, an economist at the Dutch bank ING.

“It’ll be pretty close to a technical recession,” Smith told the paper. “Even if one is avoided then we’ll still only see fairly unexciting growth numbers.”

Slowest growth in G7

Despite assertions otherwise from Boris Johnson, the UK is set to be the slowest-growing G7 economy, as both the cost-of-living crisis and Rishi Sunak’s widely criticised tax increases “slow economic activity to a crawl”, reported the Financial Times (FT). 

Just last month Johnson told the Conservative Party conference that due to the country’s speedy vaccination programme, the UK was set to have “the fastest growing economy in the G7”. But a new International Monetary Fund forecast has tipped the economies of the other six G7 countries – US, Japan, Germany, France, Italy and Canada – to grow faster. And economists speaking to the FT have pointed out that the UK’s economic performance compared to the rest of the G7 has simply been “average”.

Britain’s economy is set to increase by just 1.2% in 2023 – and inflation is tipped to be “higher than every other G7 member and slower to return to its 2% target”, said the paper. 

The UK is also at risk of entering into a “prolonged” period of so-called “stagflation” – defined as a period of slow growth in gross domestic product coupled to high inflation – thanks to surging consumer prices coupled with sluggish economic growth, reported Valentina Romei in the FT.

“The spectre of stagflation stalks the UK economy,” said Ed Monk, an associate director at the investment management company Fidelity International.

Protecting your money in a recession

While the lingering effects of Covid on the economy means that “persistent growth is not a guarantee”, The Telegraph contended that a true recession is “unlikely”. According to the Office for National Statistics, the UK’s GDP shrank by 0.2% in December, but its GDP for the final three months of the year was 1% higher than the previous quarter.

However, in the event of a recession, the paper advises consumers to “pay down any expensive debt that you may have, such as credit cards”. Those with multiple debts should “address the borrowing with the highest interest rate first, and then move on to the next”. It also advises building an emergency cash fund to help protect against unexpected bills or periods of unemployment. 

Households can lean on lockdown savings

The savings many households accumulated over lockdowns may “cushion the blow of rising costs and falling real wages”, said John Stepek in MoneyWeek.

It also means that “a slide in incomes doesn’t have to mean a corresponding slide in spending”, he added. 

But the biggest “unknown” in the economic equation is energy prices. If they come down, rather than staying where they are – or rise higher – “it would make a big difference both to inflation and to household budgets”.

Nevertheless, costs are likely to rise faster than incomes, returns on investments and cash savings, meaning that consumers will “have to be much more attentive” to their investments and personal finances in 2022 – but a recession is “by no means baked in just yet”, Stepek concluded.

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