LONDON – Price pressures in the UK are likely to intensify as the UK faces historic work stoppages amid an ongoing economic slowdown, compounded by tax hikes and higher interest rates, which policymakers have unleashed as they fight double-digit inflation.
That bleak outlook was underscored on Friday when Britain’s Office for National Statistics said the economy stagnated for the final three months of 2022. Monthly estimates suggest that economic activity slowed further at the end of the year, with gross domestic product contracting 0.5% in December.
While the UK avoided a second straight quarter of contracting economic output – the definition of a tech recession – the data offered little relief for families and businesses in distress. The rising cost of living has prompted months-long strikes by nurses, ambulance workers, train drivers and other public sector workers demanding higher wages.
According to analysis by the National Institute for Economic and Social Research, middle-class families’ disposable income will fall by up to 13%, or $4,840, over the next fiscal year. About 25% of households will not be able to pay their food and energy bills from their net income, up from 20% last year, the independent think tank estimates.
“The UK is likely to avoid a protracted recession in 2023, but GDP growth is expected to remain near zero,” the institute said. “However, as the cost-of-living crisis takes a toll on households, it will certainly feel like a recession for at least 7 million.”
For people across the UK, that means turning down the heating and skipping showers to save money on gas and electricity bills after energy prices have skyrocketed in the wake of the Russian invasion of Ukraine. It also means constantly looking for bargains or turning to grocery banks after grocery prices rose 16.9% last year.
The UK government says its policies, including a cap on gas and electricity prices aimed at capping average household energy bills at $3,027 a year, have reduced the severity of the UK’s economic downturn.
While a formal recession is often defined as a prolonged period of economic decline, experts disagree on how to pinpoint exactly when a recession begins.
The United States and the European Union have independent bodies that examine a wide range of indicators, including unemployment, consumer and business spending, before deciding whether their economies are in recession. Great Britain not.
As such, analysts eagerly awaited the fourth quarter report to see if the UK had met the technical definition of a recession. The UK economy contracted 0.2% in the third quarter.
On Friday, Treasury Chief Jeremy Hunt focused on GDP growing 4% over the course of 2022, more than any other advanced economy in the Group of Seven. But the growth happened in early 2022, before inflation picked up.
“The fact that the UK was the fastest growing economy in the G7 last year and avoided a recession shows our economy is more resilient than many feared,” he said. “However, we’re not out of the woods yet, especially when it comes to inflation.”
Regardless of the technicalities, the global economic slowdown is hitting the UK harder than other major economies.
UK inflation remains at levels last seen in the early 1980s. Consumer prices rose 10.5% yoy in December after peaking at 11.1% in October. In contrast, US consumer inflation slowed to 6.5% in December.
The UK is also facing a drop in trade with the EU as a result of leaving the bloc and raising taxes on consumers and businesses as the government tries to balance its budget and reduce debt.
Of even greater concern for economic forecasts is an increase in the number of people aged 50-65 who are leaving the labor market early and reducing productivity.
All of this reduces consumer spending and business investment.
Britain’s economy is likely to contract 0.6% this year, the only advanced nation expected to contract, the International Monetary Fund said last month.
The Bank of England expects the slowdown to continue throughout 2024, although officials say the recession will be shallower than previously forecast. The central bank has hiked interest rates 10 times since December 2021 to curb inflation.
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