UK on brink of recession, warns think tank

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·Finance Reporter, Yahoo Finance UK
·4-min read
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 food bills File photo dated 03/02/22 of an online energy bill. A growing debt crisis is arising as sharp rises in energy and food bills are causing a significant fall in real incomes for Scottish households, a new report has warned. Issue date: Saturday July 2, 2022.
Households are facing soaring energy and food bills. Photo: PA

One in five households in the UK will be left without savings by 2024 as spiralling energy and food bills continue to tighten their grip on consumers’ pockets.

Average real household disposable incomes are predicted to fall by 2.5% this year – more than during the Winter of Discontent of 1978/79 – and remain well below pre-pandemic levels for the next years, according to the National Institute of Economic and Social Research (NIESR).

The think-tank is forecasting the UK economy to enter a recession in this quarter, where it will remain until the first three months of 2023.

Inflation is set to peak close to 11% by the end of this year before returning to around 3% a year later, which is still higher than the Bank of England’s target of 2%.

Inflation is at a record high
Inflation is at a record high

Retail index inflation – which includes cost of housing such as mortgage interest costs, house prices and council tax – is expected to reach 17.7%, its highest rate since June 1980.

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The poorest households will once again be hit the hardest, with the think-tank warning that 1.2 million households will see food and energy bills exceed their disposable income.

The latest numbers from consultancy Cornwall Insight suggest the average annual bill will hit £3,615 in the new year as the price cap rises again.

Energy bills are set to soar even further.
Energy bills are set to soar even further.

“All households are facing soaring energy and food bills but too many have to resort to credit, build up payment arrears or see their savings wiped out.

"The incoming administration needs to provide immediate emergency support to the 1.2 million hardest hit households and the one-five households that will become financially vulnerable as the energy price cap is lifted and the recession begins to bite,” Adrian Pabst, NIESR’s deputy director for public policy, said.

The think-tank is calling for a universal credit uplift of £25 per week for at least six months from October 2022 to March 2023 at a cost of around £1.35bn.

It is also urging the incoming prime minister to increase the energy grant from £400 to £600 for the 11 million low-income households, at a total cost of £2.2bn.

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It said higher inflation had given the chancellor more fiscal space, although the exact amount is “arbitrary”.

“There are seven million households who will be living pay cheque to pay cheque [by 2024], that is having savings that are less than two months’ worth of their income. These are scary numbers,” Arnab Bhattacharjee, research lead and NIESR Fellow, said, warning that much of the economic hit to households is yet to come.

The research shows that between the impact of inflation and the refusal of the government to raise benefits in line with inflation, the 10% poorest households will be around 5% worse off, despite the support they have been promised on energy bills.

In its outlook, NIESR said it expects the UK economy to grow by 3.5% this year and 0.5% in 2023.

It is also anticipating the Bank of England to continue to raise interest rates to reign in soaring inflation.

However, it did mention that the central bank acted too slow and that it now needs to raise rates “to maintain credibility”.

UK interest rates
UK interest rates

The UK economy is heading into a period of stagflation with high inflation and a recession hitting the economy simultaneously," said Stephen Millard, NIESR’s deputy director for macroeconomics.

"It’s now up to the Monetary Policy Committee to make sure inflation does come down next year and the new chancellor to support those households most affected by the recession and cost-of-living squeeze,” 

Stagflation is where an economy sees slow growth, high unemployment and rising prices.

The think-tank sees the bank rate reaching 3% in the second quarter of next year.

Watch: What is a recession and how do we spot one?

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