First the good news. According to the International Monetary Fund (IMF), the UK should avoid a recession this year. And this despite their previous expectation that a shrinking economy for our domestic market was inevitable.
Having said all that, the IMF’s recent forecast does not make particularly comfortable reading. It seems the likely outcome for UK plc is a modest growth for the rest of this year – just a few basis points into positive territory. It all sounds too early to break out the champagne – or, better still, the sparkling wine of the South Downs which apparently has been overtaking the vineyards of Reims and environs in recent surveys.
Recessions are inevitable, given the nature of trade worldwide and the fact that not all events can be built into forecasting models.
Not that the IMF has given us a clean bill of health. Inflation, which has remained persistently high here when compared with our other major developed competitors, is a real concern for the number crunchers of Washington. Certainly, the latest set of numbers from the Office of National Statistics did little to calm markets. While inflation did at last dip below 10% for the first time in half a year, the fall was much less than had been expected and, worse, core inflation (i.e. inflation excluding food, alcohol, tobacco and energy) actually rose.
The fact that wage settlements have been on the up and the service sector is seeing inflation worryingly high can account for this surprise jump from 6.2% to 6.8% for core inflation – a new peak. The government will find this particularly concerning and I doubt the IMF will be too impressed by this turn of events. One consequence is that the Bank of England must now be more likely to increase interest rates. A rise to 4.75% in June is now widely anticipated, with perhaps more to follow if the inflation picture does not improve.
The problem with such a scenario as is now being painted is that ongoing higher interest rates (as the Bank of England tries to combat rising prices) lessen growth prospects and makes the chances of UK plc sinking into negative growth that little bit more likely. So far the economy has been buoyed by consumer demand. This has been helped in no small measure by King Charles’ accession to the throne and this year’s Coronation. Certainly, celebrations around this event saw spending on wine and food increase and hospitality benefit as a consequence.
So far, so good. Still, the IMF’s reassessment on our medium term economic prospects was concluded before these latest inflation numbers were in the public domain. We might just avoid sinking into a recession, but the fear of a global recession lurks in the background, not least because of worries over US debt – a concern largely dismissed by markets. If, indeed, this turns out to be the outcome, then it seems unlikely we can avoid a slowdown. This seems like a good moment to try to define a recession and examine just what it might mean to you and me.
Recessions are generally defined as two quarters of contracting economic output. A single quarter’s dip might be dismissed as an aberration, but if the decline persists for six months, then a real problem is perceived to exist. And recessions are inevitable, given the nature of trade worldwide and the fact that not all events can be built into forecasting models. However, recessions will necessarily vary in magnitude and the effects for you and I could be significant or barely noticeable.
The two most recent recessions were stimulated by specific events. The financial crisis of 2008 saw US GDP contract by 5%. COVID-19 saw an even greater contraction, with economic activity declining by twice as much. The current pressures are less significant, with the rise in inflation cited as the most important element in driving economic activity lower. After all, if consumers are feeling under threat, they tend to spend less, which is then reflected in lower economic activity.
So far consumption has held up relatively well, not just here but around the developed world. And employment numbers do not point to a major economic downturn. This must be considered as encouraging, but the dark clouds on the horizon are far from dispersing. We continue to have issues here at home which may yet impinge on our economic performance. A recession here cannot be ruled out but, barring unforeseen developments, it is unlikely to be more than a modest contraction that, in the end, we may not even notice.
Illustration by Adi Kuznicki
