Recession fears grow amid stagnating economy

With the cost-of-living crisis continuing to worsen with no immediate end in sight, the potential of a UK recession in 2022 looms in the distance.

GDP is estimated to have increased by just 0.8% over the entirety of Q1 2022, while the economy rests at 1.2% above its pre-pandemic level in February 2020.

But concerns of a stagnation or even a recession were raised by news that UK GDP had shrunk by 0.1% in March, following estimates that the UK had experienced zero growth in February 2022.

Q1 growth can largely be attributed to the lifting of Covid restrictions and the way the Ofgem energy price cap protected UK households, but overshadows the poor performance in the latter parts of the period.

Rising energy prices and bottlenecks in supply post-Covid continue to push up inflation to a 40-year high (9% in April), squeezing both household and business spending and investment.

A recent rise in National Insurance contributions and interest rates by 1.25 and 0.25 percentage points respectively have only added to the crisis.

As such, everything seems to be pointing towards a poorer second quarter than the first.

Indeed, the Bank of England has said the economy might slide into recession this year, with higher energy prices expected to push inflation above 10% later this year.

What did previous forecasts say?

The prospect of the UK suffering two consecutive quarters of negative output - the technical definition of a recession - wasn't considered by many experts and economists earlier this year.

For instance, the Office for Budget Responsibility (OBR) predicted in March that the economy would grow by 3.8%, down from the 6% growth it had predicted in October 2021.

Meanwhile, it had said inflation would peak at 8.7% in Q4 2022 - something that has happened far earlier than expected.

However, these figures from the OBR were worked out using a set of market assumptions taken during the first week of the invasion of Ukraine, partly explaining the differences between forecast and reality.

What the experts are saying now

According to Suren Thiru, head of economics at the British Chambers of Commerce, the first quarter slowdown will be followed by a "mild contraction in economic output".

Higher inflation, energy bills and taxes are likely to suppress consumer spending and business investment, he said.

"Declining health sector output following the scrapping of free Covid testing in April and the extra bank holiday in June are also likely to drag on second quarter UK GDP", Thiru added.

Julian Jessop of the Institute for Economic Affairs said March's GDP figures are "bound to encourage fears that the economy is heading into recession and strengthen calls for an emergency Budget", but fell short of predicting a recession.

He did say, however:

"Even if the UK avoids a recession, it will certainly feel like one for many households struggling to pay their bills."

Will there be an emergency budget?

Tory MPs recently voted down a plan to trigger an emergency budget despite the worsening cost of living crisis, but calls for one persist with the BCC saying it is "vital".

Chancellor Rishi Sunak told business leaders that the Government "stands ready to do more" to help the UK cope with rising costs, but hinted any significant support or tax changes would be announced in an autumn Budget.

On Monday (23 May), Prime Minister Boris Johnson said people will "just have to wait a little bit longer" for support with the cost of living.

However, any spending plan is likely to be conservative in scope, owing to the Government's fear a significant fiscal stimulus could push prices while it remains opposed to raising the deficit.

If you have concerns about running your business during this difficult time, don't hesitate to get in touch with our team.