The British economy is at increasing risk of falling into a summer recession amid the biggest contraction in household income since the mid-1950s, as rising inflation limits purchasing power, forecasts say.
Economists said the double blow from the slowdown after the blockade and rising living costs after Russia’s invasion of Ukraine could lead to a drop in gross domestic product (GDP) for two consecutive quarters, which is the definition of a recession.
After lower-than-expected growth in February and after inflation reached its highest level since 1992 last month, City forecasts said the UK’s GDP is now on track to grow by around 1% in the first quarter of 2022, before falling back this summer.
Analysts said activity would be reduced by an additional banking holiday for the Queen’s platinum anniversary in July, as public holidays usually lead to a drop in overall economic output. The return to lower levels of activity in the health sector after the winter rush to vaccinate people against Covid-19, as well as households that limit their spending amid rising living costs, is also expected to affect growth.
James Smith, an economist at Dutch bank ING, said the economy is likely to shrink in the second quarter. The bank forecasts a contraction of 0.3% in the three months to the end of June, followed by growth of only 0.2% in the third quarter.
“It will be quite close to a technical recession. “Even if this is avoided, we will still see some rather unsettling growth figures,” Smith said.
“If people spend more money on energy, you would expect some of the insignificant ones to reduce sales. We will watch that, “he added.
Figures from the National Statistics Office, released on Friday this week, are expected to show a decline in retail sales in March as households tighten their belts. This comes when retail bosses warn of a slowdown in sales amid rising living costs.
Neil Shearing, the group’s chief economist at consulting firm Capital Economics, said household disposable income is expected to fall by about 1.9 percent this year. This is a larger than 1.8% decline in real incomes in 1977 and the largest since the beginning of modern records in the 50s of last century.
“By comparison, real incomes fell by” only “1.5% in 2011 after the global financial crisis,” he said. “Since the economy is already close to leveling off, it obviously won’t take long to produce a month or two with falling production.
The warnings come after International Monetary Fund chief Kristalina Georgieva said global growth will slow this year and next as Covid shockwaves and the war in Ukraine keep inflation higher than expected.
The strength of the British economy will depend to some extent on the fact that households that saved during the pandemic continue to spend. However, while nearly £ 250 billion was accumulated during the blockade, most of it was concentrated among wealthier families who can continue to work from home, which means that those who are most exposed to -higher risk of rising living costs will be felt most strongly.
Thomas Pu, an economist at accounting firm RSM UK, said he expects households will likely have to dive into savings or take on debt to protect themselves from rising inflation.
“This is a key reason why we believe the UK will avoid a recession this year. However, our forecasts suggest that GDP growth will average only 0.1% in each of the remaining three quarters of this year – so it will not take much to raise oil prices or disrupt supply chains to push the UK into a recession, ”he said.
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