UK economics: warnings of a gloomy winter as risks skewed to the downside
There is likely to be the beginning of a technical recession in 2022. With inflation and the cost-of-living denting consumer confidence and spending power, it's likely that GDP will contract in final quarter of 2022 and the first of 2023.
3 minutes to read
In the first quarter of 2022 GDP grew by 0.8% compared to Q4 2021, 8.7% higher than the previous year. I wrote last month that we will likely see a technical recession begin with successive contractions in Q4 2022 and Q1 2023. The Bank of England (BoE) in their August Monetary Policy Report painted a more pessimistic future, forecasting five consecutive quarters of decline starting in Q4 2022, an overall contraction of 2.1%.
Inflation – a monetary phenomenon no more
As expected, inflation continued to climb, to 9.4% in June, and will go higher with the BoE expecting it to exceed 13% in October. With the energy price cap extending in October, and potentially again in January as we move to a three-monthly review, we need to be aware that there are more decades-busting numbers to come, and we will see inflation in double digits.
The Bank of England raised the interest rate by 50bps in August taking the rate to 1.75%, the biggest rate hike in 27 years, and pledged to begin quantitative tightening. As pointed to in their report the market expectation is now of 3% in Q3 next year in either scenario (see here for my assessment of what that means for the housing market). The Bank will be led by the economy but maintains its commitment to bringing inflation, and inflation expectations in line.
The rising cost of food, fuel and finance (amongst others) is starting to weigh on households, average mortgage repayments have risen by a third between November and June. It’s important to watch what consumers do rather than what they say but the drop in confidence is looking to filter through to action and winter months will prove the toughest. Excess savings dipped for the first time in Q1 2022, according to analysis of ONS data but still remain a hefty £185 billion.
Job security remains strong
The one area which continues to prove positive is the labour market. Unemployment sits at 3.8% and remains an ‘employees market.’ Looking at vacancies and unemployment by sector statistics from the ONS, ‘Professional scientific & technical activities’, ‘Accommodation & food service activities’ and ‘Human health & social work activities’ are sectors with the biggest mismatch of vacancies to the number unemployed. The first two are also where median pay is rising the fastest, 9.2% and 9.4% year-on-year respectively.
The strength of the labour market continues to be a ray of sunshine in a cloudy outlook. The Bank noted that the path for labour and wage will dictate domestic inflationary pressures, the current forecasts are that pressure will alleviate somewhat in 2023.
A new leader may face a technical recession in 2023
We will have a new prime minister in early September – either Rishi Sunak or Liz Truss. Both candidates’ have a central pledge to cut taxes which could support growth but may stoke further inflationary fears.
Overall, notwithstanding any new fiscal support, the UK economy is slowing and likely to see a technical recession in early 2023. Provided energy prices don’t continue to climb for households in 2023 and the labour markets remains strong, but wage growth doesn’t add to inflationary pressure, then perhaps the Bank of England will prove far too pessimistic.
Maybe that is a lot of ‘ifs’, and there is no denial that the winter months will be critical and tough for many, but I remain slightly cautiously skewed to a slowing not reversing. We will be examining in greater detail over the coming weeks some underlying forces to provide a clearer picture.
Read more or get in contact: Flora Harley, residential research
Subscribe for more
For more market-leading research, expert opinions and forecasts, sign up below.
Subscribe to our newsletter