UK recession warning: Households face ‘buckling’ as risk of economic shrinking rises

UK recession: ‘The worst is now starting’ warns Ken Clarke

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High prices are starting to bite, with tighter grips on purses and fewer car journeys being recorded, according to the Office for National Statistics. The statistics body said the economy shrank by 0.1 percent in March, with services tumbling 0.2 percent to pull down the UK’s GDP for the month.

Whereas the economy grow by 0.8 in the first quarter of 2022, March saw people restricting their spending.

These statistics do not take into account the yet-to-be-seen influence of rising energy bills throughout April, or the increase in national insurance contributions.

Paul Dales, chief UK economist at Capital Economics, told the BBC that the “cost of living crisis” has revealed a lack of “momentum” in the economy, compared to previous predictions.

He said the ONS figures “suggest the economy had less momentum than we thought even before the full hit from the cost of living crisis has been felt”.

In the wake of the new data’s release, he added, the risk of a recession “has just risen”.

The economy shrinking for two consecutive periods of three months would be defined as a recession.

The Bank of England (BoE) warned earlier this month that inflation could touch 10 percent by the end of the year, with the UK facing a “sharp economic slowdown”.

Rising food, energy, and fuel costs have already seen inflation increase to 9 percent, according to Bank of England estimates, after energy bills skyrocketed by 54 percent.

The BoE raised interest rates to 1 percent from 0.75 percent earlier in May, which was the highest level since 2009.

A leading think tank then argued the BoE would need to push up interest rates to 2.5 percent for a number of years to bring inflation under control.

The National Institute of Economic and Social Research’s deputy director, Stephen Millard, said they expected “inflation to come down fairly quickly, and so do the bank, but on higher interest rates than are in the BoE forecasts.”

Suren Thiru, head of economics at the British Chamber of Commerce, said there was “a real chance the UK could be in recession by the third quarter of this year”.

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He told the Telegraph: “That is partly due to cost pressures – high inflation, energy bills – and also national insurance squeezing consumer spending and business investment.”

He added: “We are seeing a real financial squeeze, a lot is on households but we are seeing similar issues for businesses as well.”

But as households slash back on their spending habits, household real expenditure is likely to “buckle” in the second quarter of 2022, according to Samuel Tombs of Pantheon Macroeconomics.

He attributed this to the “huge jump in energy prices and the increase in employees’ national insurance contributions” and falling GDP.

Adrian Pabst, deputy director at the National Institute for Economic and Social Research, said poorer households will be most affected by price jumps.

He said: “As you move down the income deciles, food and energy bills are going to be taking up a lot of real disposable income,” he noted.

He added that the costs of food and energy bills will be “greater than their disposable income” for around 1.5m UK households.

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