Britain could fall into recession this summer, say experts | Cost of living crisis

Britain’s economy is at growing risk of falling into a summer recession amid the biggest squeeze on household incomes since the mid 1950s, as soaring inflation curtails consumer spending power, forecasters have said.

Economists said the double blow from slowing post-lockdown growth and rising living costs after Russia’s invasion of Ukraine could result in a fall in gross domestic product (GDP) for two consecutive quarters, which is the definition of a recession.

After a weaker-than-expected growth performance in February, and with the inflation rate reaching the highest levels since 1992 last month, City forecasters said UK GDP was now on track to grow by about 1% in the first quarter of 2022 before slipping into reverse this summer.

Analysts said activity would be reduced by an extra bank holiday for the Queen’s platinum jubilee in June, as public holidays usually lead to a drop in overall economic output. The return to lower rates of activity in the health sector after a winter rush to vaccinate people against Covid-19, as well as households reining in their spending amid the soaring cost of living, are also expected to weigh on growth.

James Smith, an economist at the Dutch bank ING, said the economy was likely to shrink in the second quarter. The bank forecasts a 0.3% contraction in the three months to the end of June, followed by growth of just 0.2% in the third quarter.

“It’ll be pretty close to a technical recession. Even if one is avoided then we’ll still only see fairly unexciting growth numbers,” Smith said.

“If people are spending more money on energy you’d expect some of the non-essentials to fall in sales volumes. That’s what we’ll be watching,” he added.

Figures from the Office for National Statistics due on Friday this week are expected to show a fall in retail sales in March as households tighten their belts. It comes as retail industry bosses warn of a slowdown in sales amid the rising cost of living.

Neil Shearing, the group chief economist at the Capital Economics consultancy, said household disposable income was set to fall by about 1.9% this year. This is bigger than the 1.8% drop in real incomes experienced in 1977, and the biggest since modern records began in the 1950s.

“By comparison, real incomes fell by ‘only’ 1.5% in 2011 following the global financial crisis,” he said. “With the economy already close to flatlining, it clearly would not take much to produce a month or two of falling output.”

The warnings come after the head of the International Monetary Fund, Kristalina Georgieva, said global growth would slow this year and next as the shockwaves from Covid and the war in Ukraine keep inflation higher for longer than first expected.

The strength of Britain’s economy will to some extent depend on households who saved during the pandemic continuing to spend. However, while close to £250bn was accumulated during lockdown, most of this was concentrated among wealthier families able to keep working from home, meaning those at most risk from the surging cost of living will feel the biggest pinch.

Thomas Pugh, an economist at the accountancy firm RSM UK, said he expected households would probably need to dip into savings or take on debt to protect themselves from rising inflation.

“This is a key reason why we think the UK will avoid a recession this year. However, our forecasts suggest GDP growth will average just 0.1% in each of the remaining three quarters of this year – so it would not take much of a rise in oil prices or a disruption in supply chains to push the UK into recession,” he said.