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26 April, 2022

Weekly data: Is the UK heading for a recession?

The numbers look stark for the UK in the first few months of 2022, with many signs pointing to a possible recession looming.

By Ben van der Merwe

UK consumer confidence has sunk to its lowest levels since 2008, raising concerns that the country may be sliding into recession. 

Retail sales fell by 1.4% in March, adding to a 0.5% fall in February. The new figures were met with concern by investors, leading the pound to sink to its lowest level against the dollar since late 2020.

Data from the Office for National Statistics (ONS) shows that the decline was sharpest among online-only retailers, which saw their trading volumes fall by 7.9% in March, following a 6.9% fall in February. Reduced fuel usage and food shopping also contributed to the reduction in spending.

High inflation hits UK economy

The slowdown is being driven by high inflation, which has eroded consumers’ disposable incomes. Real incomes have fallen by 1.8% since May 2021, according to ONS figures, and are expected to fall by another 2.3% this financial year – the biggest fall in a single financial year since records began in 1956.

An ONS survey in March found that 87% of UK adults had seen their cost of living increase in the past month, up from 62% in November. As a result, more than half (54%) said they were reducing their spending on non-essentials, with 45% cutting back on domestic energy usage and 33% reducing their spending on food and other essentials.

For those on the lowest incomes, the issue is likely to be compounded by a 6% real-terms cut to key government benefits this year. Most benefits rose by just 3.1% in April, despite the Office for Budget Responsibility forecasting a 7.4% rise in consumer prices this financial year.

The fall in consumer confidence poses a problem for the UK’s central bank, which has been under pressure to clamp down on inflation by raising interest rates. In late April, Bank of England governor Andrew Bailey acknowledged that the central bank was walking a “very, very fine line” between controlling inflation and avoiding a recession. The bank’s Monetary Policy Committee, which decides the UK’s base rate, is due to vote on a possible interest rate rise on 5 May.

Bailey suggested that the persistence of inflation in the face of reduced consumer spending was a result of the UK’s historically tight labour market. Unemployment has fallen to just 3.9%, its lowest level since before the Covid-19 pandemic. As of early April, 34% of large and medium-sized businesses in the UK reported experiencing labour shortages, up from 31% in March. 

The International Monetary Fund estimates that labour shortages in the US and UK have led to a significant uptick in nominal wages, adding 1.5 percentage points to inflation in both countries. 

The organisation’s World Economic Outlook report in April pinned the blame on workers’ growing reluctance to participate in the labour market. In both the US and UK, health concerns are thought to have contributed to a larger number of older workers taking early retirement, while higher rates of voluntary resignation have led to particularly severe shortages in the hospitality sector.

Labour isn’t the only input in short supply, however. In April, 29% of UK businesses (including 54% of hospitality businesses) reported that high energy prices had impacted their production process. While two-fifths of businesses (39%) said they had been able to absorb the additional input costs resulting from inflation, 29% reported passing them on to consumers.

Energy prices have risen dramatically in recent months, with the war in Ukraine adding to existing supply pressures resulting from the Covid-19 pandemic. Whether prices rise further will depend largely on the progress of the war and whether the EU decides to embargo imports of Russian gas.

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