Today’s big question

What a recession would mean for the UK

Latest data signals that we should prepare for a shrinking economy – and all the negatives that come with it

The impact of high inflation on business and consumer confidence is threatening to plunge the UK into a recession. 

The Times reported that quarterly economic growth is on course to contract for the first time since the start of last year in the three months to June, “driven by multi-decade-high inflation pinching household spending, a rising tax burden on businesses and households, and additional bank holidays in the second quarter”.

Analysts fear that the economy’s “growth momentum” could “grind to a halt” later this year, possibly triggering a recession – widely defined as two successive quarters of negative growth.

Data from S&P Global Market Intelligence has found that UK firms have been hit with a slowdown in new orders, with growth the weakest it has been since February 2021. At the same time business confidence has slumped to its lowest levels since May 2020, as firms worry about drops in customer spending, as well as the impact of rapid inflation, which has reached its highest levels in 40 years.

Chris Williamson, chief business economist at S&P Global, said the data suggested the UK faces “a troubling combination of recession and elevated inflation”, and warned that the economy “is starting to look like it is running on empty”. 

What could tip the economy into full recession?

“Multiple factors in play have contributed to the current financial crisis facing the UK,” said Unbiased. “In isolation, they are big challenges but not a disaster. However, a combination of the successive lockdowns in the UK slowing down the economy, along with Russia’s invasion of Ukraine damaging the international market price of gas and oil, mean that the current volatile climate could be set to take another downward turn.”

“The data chimes with widespread warnings that the economy faces a prolonged period of low growth, caused by a cost of living crisis that is only forecast to intensify in the months ahead as energy bills rise to stoke inflation further,” reported Sky News.

City A.M. said: “Firms have retrenched in response to Russia’s invasion of Ukraine, high inflation and ongoing supply chain disruption souring the trading environment, dampening the UK’s growth prospects.”

Consumers are rapidly reducing their spending in the face of a “once in a generation” cost-of-living squeeze, George Lagarias, chief economist at accountancy firm Mazars, told The Guardian.

“For an economy where consumption is so central, the signs going forward are disconcerting. Technically, we may not yet be in a recession, but for many consumers it certainly feels like one.”

What would a recession mean for the country?

Two successive quarters of decline in gross domestic product (GDP) may sound abstract, but a recession has real-life consequences on everything from job prospects and housing to investments.

“Businesses are likely to try and save money during a recession, meaning jobs could be lost, and with spiralling inflation and energy price hikes, wages may be unable to cover the cost of everyday essentials,” said Unbiased.

The global financial crisis of 2008 resulted in UK unemployment levels reaching 10%. However, “no one can predict the severity or the length of [a recession], making it difficult to outline the tangible impact on UK workers”, said the financial advice site.

Forbes reported that with more people unable to pay their bills during a recession, “lenders tighten standards for mortgages, car loans and other types of financing”. This means you may need a better credit score or a larger down payment to qualify for a loan than would be the case during more normal economic times.

Investments in assets such as stocks, bonds and property can lose value in a recession, cutting income and savings, and denting retirement funds too, it added.

As well as the effect on lower-skilled and lower-paid workers, recessions “also impact young people disproportionately, as we saw from the recession in 2008”, said HuffPost UK.

Are there any positives?

“There are arguments that recessions are part and parcel of the economic cycle,” said the i news site. “They can lead to a clearing out, or what some economists call a reset or ‘correction’.”

This can have knock-on positive effects for some people or sectors. High inflation, for example, such as that seen in the early 1980s, usually leads to higher interest rates, which is good for people with savings.

The recession of the early 1990s, meanwhile, led to lower house prices and interest rates, allowing Generation X and younger Babyboomers to get on the property ladder.

What about the rest of the world?

The risk of the US and Europe “sliding into recession” has “picked up sharply” according to economists who spoke to the Financial Times ahead of the G7 summit in Bavaria this weekend.

Holger Schmieding, chief economist at Berenberg Bank, told the paper that the balance had now “tipped” in favour of an economic contraction next year in the US and Europe, arguing that “what used to be a rising risk has now turned into the base case”.

The FT said that economists had become “increasingly pessimistic” over the chances of a recession, following the Federal Reserve’s decision to increase interest rates to counter “soaring” inflation, and as concerns mount over Europe’s gas supply in the coming winter. The International Energy Agency warned this week that Europe must plan now for winter without any Russian gas exports.

“US recession risks are uncomfortably high and rising,” said Mark Zandi, chief economist of Moody’s Analytics, who spoke to the paper. “I would put them at 40 per cent in the next 12 months, and more or less even odds over the next 24.” Zandi added that Europe was in an even worse situation.

“To avoid recession, the global economy needs a bit of luck and for the economic fallout from the coronavirus pandemic and Russian aggression to wind down quickly, along with some deft policymaking by the Fed and other central banks,” he said.

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