There has been an ongoing debate whether the UK is or is not in a recession – and if not, when we can expect to be one.
As it stands, so far the UK economy has avoided falling into a recession. The economy grew slightly by 0.3 per cent in January, which is not unimpressive given the challenges it was facing from a combination of double-digit inflation and rising borrowing costs on the one hand and plummeting real incomes on the other.
Growth, which was higher than the 0.1 per cent forecast, was driven by the services sector. But don’t rush to celebrate just yet because although the economy’s performance was better than expected growth was modest and flatlined in the three months to January.
Alice Haine, personal finance analyst at Bestinvest, said there was still reason for caution.
“GDP remaining flat in the three months to January 2023 is still a concern for household finances as it indicates companies are making less money, slashing investment and re-examining their staff requirements – something that could see the pace of pay rises slow or worse cause a spike in redundancies.”
The flatlining of the economy together with the construction sector facing sharp contractions tallies with the picture of the UK economy shrinking overall this year, even if a technical recession – defined as two consecutive quarters of negative growth – is avoided, according to Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
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“The takeaway for businesses is unfortunately that things are going to remain very challenging, with stagnation a likely scenario for some time,” she said.
The UK economy took a battering from Covid lockdowns and is the only one in the G7 to remain below its pre-pandemic size. It also shed half a million workers with the pandemic, leaving gaps in the workforce that are difficult to fill and pile pressure on inflation.
High inflation continues to bedevil the British economy and push real wages downwards. This combined with rising interest rates pushing up the cost of mortgages means Britons won’t be feeling any richer any time soon despite avoiding a recession.
The double whammy of rising inflation and higher interest rates makes it tricky territory for the Bank of England’s rate-setting Monetary Policy Committee (MPC) and private sector firms to navigate.
There are fears that private sector pay rises and public sector strikes could keep inflation high. It currently sits at 10.1 per cent.
Interest rates are the main tool in the MPC’s armoury for controlling inflation but if the committee hikes them up too sharply it risks hitting economic output, raising the cost of borrowing and propelling the economy into recession territory.
It has been suggested it will increase to 4.5 per cent later this month.
The spectre of a possible jump in energy bills from April along with a slew of tax and bill rises in the new financial year adds to the personal finance pain.
“For households there is more pain to come in the short term with a potential 20 per cent rise in energy bills from April, unless Chancellor Jeremy Hunt extends his support package at the Budget, along with other household bill rises such as water and council tax,” Haine said.
“Throw in the higher tax burden – a result of frozen or reduced personal tax allowances – and the fact that interest rates are already at a 15-year high and causing significant pain for homeowners and borrowers alike – and the outlook from here appears uncertain.”
