UK recession warning: Bank of England on alert as Britons face ‘disaster’ year

UK 'on the brink' of double-dip recession warns Lord Lamont

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The fresh concern follows the Bank of England’s announcement two weeks ago that it was raising interest rates for a second time in response to the fallout from the coronavirus pandemic to 1 percent. Though it did not use the word recession, it said that “UK GDP growth is expected to slow sharply” in the coming financial quarters.

On Monday, Bank of England governor Andrew Bailey, and two members of the institution’s Monetary Policy Committee (MPC), will be probed by MPs on the likelihood of a UK recession.

The Treasury Committee is also expected to ask whether “recent decision to increase interest rates contributed to the worsening of the economic outlook for the UK, as well as rises in the cost of living”, Parliament said.

Though the Bank of England may not have used the R-word, many other economists are coming to the conclusion that the UK is headed for a recession – if it isn’t already in one.

However, opinions differ on how long and how deep that recession will last.

One former member of the MPC said recently that the Bank of England should be willing to cause a small recession in order to fix inflation – though this attracted criticism.

At the time, Mr Bailey – who previously attracted criticism for suggesting workers should show “restraint” when asking for pay rises, despite a soaring cost of living – said he recognised the “hardship” Britons would feel.

He added that it was “particularly those on the lowest incomes often with little or no savings, who are hit hardest by increases in the prices of basic necessities like food and energy.

“The economy has recently been subjected to a succession of very large shocks. Russia’s invasion of Ukraine is another such shock.”

The MPC’s May report said its forecast “reflects the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real income”.

It added: “Should recent movements prove persistent as the central projections assume, the very elevated levels of global energy and tradable goods prices, of which the United Kingdom is a net importer, will necessarily weigh further on most UK households’ real incomes and many UK companies’ profit margins.

“This is something monetary policy is unable to prevent. The role of monetary policy is to ensure that, as this real economic adjustment occurs, it does so in a manner consistent with achieving the 2 percent inflation target sustainably in the medium term, while minimising undesirable volatility in output.”

Kallum Pickering, a senior economist at Berenberg Bank, reacted at the time: “If we are unlucky, the UK is already in the early stage of a recession.”

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On Thursday, Paul Dales, chief UK economist at Capital Economics, told the Guardian: “Suddenly, our forecasts that GDP will be flat in both the second quarter and the third quarter seem pretty optimistic.

“A contraction in GDP or a recession now feels a bit more likely.”

Meanwhile, Torsten Bell, the head of the Resolution Foundation, a living standards think-tank, said: “This year is a disaster for poorer households and you do not get through that with no answer for them.”

One of the first organisations to recognise the real possibility of a recession was the National Institute of Economic and Social Research (NIESR).

On Wednesday, it published its spring outlook, in which it claimed the MPC would have to “navigate carefully the treacherous waters caused by the tension between, on the one hand, allowing inflation expectations to deanchor and, on the other hand, plunging the economy into a deep recession”.

It added: “Activity is expected to decline in the third and fourth quarters of the year – a ‘technical’, but nonetheless relatively shallow, recession – with high and persistent inflation, rising interest rates and tightening fiscal policy combining to restrain output growth.”

While the UK is fairing poorly, though, Europe is said to not be doing much better. Julian Jessop, an economist and former Treasury adviser, said yesterday (Friday) that while industrial production fell 0.2 percent in the UK, it fell by 1.8 percent in Europe month on month.

He also argued that if the UK’s GDP stagnates over the rest of the year – as is widely expected – “growth would average about 3.5 percent in 2022 as a whole.

“This compares to the OBR’s 3.8 percent [projection], the IMF’s 3.7 percent, and Bank of England’s 3.75 percent.”

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