JThese are worrying times for Claire Tasker’s jewelry store. With the soaring cost of living putting acute pressure on households across the country, the Hertfordshire-based silversmith has seen firsthand how consumers are cutting back on spending.
‘If people don’t have money to spend, it’s items like mine that they won’t really think about buying,’ says small business owner, who sells her fine handmade jewelry from his studio in Hitchin.
It’s not just that sales are under pressure. The cost of gold, silver, copper and precious stones used to manufacture its wares also rose dramatically.
“I don’t see it getting any better,” Tasker says. “The cost of living affects me too. There’s the stress of trying to make money, and it’s scary to be self-employed. You don’t have a stable income.
What Tasker is experiencing in Hitchin is a microcosm of the broader economy. Inflation has been on the rise since last summer and there were already signs of the post-Covid recovery running out of steam even before Vladimir Putin ordered his troops into Ukraine. The economy grew only 0.1% in February and retail sales fell more than expected in March.
In April, cost of living pressures intensified. The average energy bill has increased by £700 per year; Rishi Sunak raised taxes; automobile costs have increased. The biggest squeeze on living standards since the 1950s has made consumers gloomier and far less willing to spend in stores.
For experts, the question is not whether the economy will slow down but whether it’s time to start saying the R word: recession. David Blanchflower, a former member of the Bank of England’s monetary policy committee, has no doubts. “Every piece of evidence suggests the recession is coming,” he says.
The prospect of the UK suffering two consecutive quarters of negative output – the technical definition of a recession – was certainly not considered likely by the Office for Budget Responsibility (OBR) when it prepared the forecast for the Chancellor’s Spring Statement. While noting the headwinds facing consumers, the OBR said growth would be 3.8% this year. The latest World Economic Outlook from the International Monetary Fund predicted growth of 3.7% – the strongest among the G7 group of industrialized nations.
The OBR and the IMF predict a sharp slowdown in 2023 but the bad economic news has arrived earlier than expected. Even less gloomy economists than Blanchflower admit that recession risks have increased in recent months. Deutsche Bank says the likelihood of an economic slowdown now stands at almost one in three. With inflation expected to stay higher for longer, pressure on households to retreat will intensify over the summer. For many consumers, this will look like a recession, even though official data indicates otherwise.
If the economy falls into recession, the Treasury and the Bank of England will be blamed for making policy mistakes. A Treasury spokesman said: “We continue to support the economy now. We are providing a £22billion package to ease pressures on households this year and help businesses, including through a tax cut of up to £1,000 for half a million small businesses.
Rachel Reeves, the shadow chancellor, says Sunak erred in not doing more in her spring statement to protect consumers from the coming economic storm.
“The UK economy has already been sorely tested by the Chancellor’s failure to stimulate business and set out a real plan for growth. We now look forward to another year of declining living standards and paltry growth,” she said.
Labor is calling on the government to hold an emergency budget to head off growing economic risks. With local elections this week, the soaring cost of living could take a heavy toll on conservatives. Reeves said Sunak’s comments that it was “foolish” to expect more support showed the party was out of touch.
“We are the only major economy to raise taxes on people in the midst of a cost of living crisis and it is a choice that will make conditions worse for families already feeling the crisis.”
The Treasury rejects the accusation that it fell asleep at the wheel, pointing out that investment will be boosted this year by the super-deduction tax relief, and that the spring statement included tax breaks and reductions in excise duties for motorists. Even so, Sunak’s popularity declined as the cost of living crisis worsened.
Consumer spending could be supported by more than £200bn of savings accumulated by households during the pandemic. However, the savings glut was mostly concentrated among the richest 40% of society, while low-income households lost money. While average wages are unlikely to keep pace with inflation, those in the public sector and precarious zero-hour jobs are expected to lose the most ground this year.
The Bank of England’s monetary policy committee is expected to respond to an annual inflation rate of 7% – the highest in 30 years – by raising interest rates this week for a fourth consecutive meeting. City expect a quarter-point rise on Thursday to 1% – the highest level since immediately after the 2008 financial crisis.
The Bank wants to prevent persistently high inflation from taking hold, but economists warn there is a risk that rising borrowing costs will add to the problems facing businesses and households as the economy is already shaky. Of the five cycles of tightening in the UK since the late 1970s, four have ended in recession.
“By focusing on containing any second-round effects on wages and prices, the Bank risks tipping the economy into recession,” said Paul Dales, chief UK economist at the consultancy. Capital Economics. Although he expects Threadneedle Street to raise interest rates to as much as 3% by 2023, a severe downturn could force him to slow down.
“A slight recession and/or a modest decline in house prices may not deter the Bank too much if price pressures remain strong. But if the economy and/or the housing market is weaker than expected, the Bank might not raise interest rates as much,” he said.
Stephen King, senior economic adviser at HSBC, said central banks had been caught up in rising inflation and there was still speculation it would return to target with only modest rate hikes of interest.
“History suggests that once you have an inflation problem, you have to go through a lot of economic hardship to get rid of it,” King added.
For Tasker, the situation is complicated by Brexit, as higher shipping costs and delays make it harder to sell to EU customers. During the coronavirus pandemic, it had benefited from booming domestic demand, although this is drying up.
“I have seen a drop in sales since the news broke that there would be increases in energy prices. It’s not just me, it’s through the Facebook groups I’m in with people who have small businesses,” she said.
“If people don’t spend, businesses will close. I’m not sure it’s helpful at all for the economy.
Worries about the global economy also grew this week, with data showing eurozone manufacturing output growth stagnated in April, while Chinese factory activity contracted at a faster rate. as Covid-19 lockdowns hit industrial production and disrupted supply chains.
How are the other major economies doing?
The world’s largest economy contracted unexpectedly in the first quarter. GDP fell 0.4% amid a weaker contribution from trade and lower government spending as Covid aid was phased out. Inflation hit 8.5%, the highest in four decades, putting pressure on the Federal Reserve to raise interest rates.
Growth slowed to 0.2% in January-March, from 0.3% in the fourth quarter of 2021. Germany recovered from a contraction in the final months of last year, but the economy France stagnated, Italy contracted and Spanish growth slowed. Experts warn that the region is at increased risk of inflation and economic slowdown due to tensions with Russia amid the war in Ukraine, due to dependence on gas imports.
The world’s second-largest economy is under pressure as Beijing’s zero Covid policy has led to major cities shutting down in an attempt to contain the spread of Omicron, weighing on factory output and consumer spending. The impact is expected to ripple through global supply chains, hitting activity in other countries. GDP grew by 1.3% in the first quarter.
Russia is expected to fall into a deep recession this year and next as sweeping Western sanctions imposed after Vladimir Putin’s invasion of Ukraine impact economic activity. GDP is expected to fall 8-10% in 2022, the largest annual decline since immediately after the collapse of the Soviet Union in the 1990s. Inflation is expected to reach 23%.