UK recession: how worried should we be?

The UK recession could be twice as severe as previously feared, driven by higher taxes, reduced government support, and a harsher global outlook, according to business consultancy EY.

In an updated forecast released today, analysts at EY’s Item Club predict that UK GDP will fall by 0.7% this year before growing by 1.9% in 2024 and 2.2% in 2025 – a downgrade from its October forecasts of -0.3%, 2.4% and 2.3%, respectively.

But while EY’s gloomier forecast has hogged headlines, it seems to be the exception rather than the rule.

The mixed bag of economic data in recent weeks has led to varying predictions by the rune-readers. Some believe that while the UK will enter recession (two consecutive quarters of negative growth), the downturn will be shallower and shorter than feared.

Bank of England governor Andrew Bailey said as much recently, predicting that the UK had turned a corner on inflation, which would start to decline steeply by the spring. Even the EY analysts expect the UK economy to be growing again by the summer.  

Lurking behind the forecasts, as ever, are energy prices, sent into orbit following Russia’s invasion of Ukraine and now falling back substantially.  

The impact is already being felt. Germany’s chancellor Olaf Scholz is optimistic his country will avoid recession this year. This is a big deal, not least because the German economy is reliant on manufacturing, its most energy-intensive industry.

And analysts at JP Morgan said on Friday that they expected the UK economy to shrink by 0.1 per cent this year – better than their previous forecast of a 0.3 per cent decline – thanks to falling wholesale gas prices easing the burden on consumers and businesses.

The question is whether this downward trend in energy prices will continue. China, for instance, is set for an economic boost after emerging from its zero-Covid shell. While this is good news for global growth, greater Chinese demand will also put upward pressure on world commodity prices – including energy.

As Rishi Sunak likes to remind us (when it’s convenient), wholesale energy prices are driven by international forces which UK policymakers have close to zero control over.

What they can do is try to temper some of the worst effects.

It was in this vein that Jonathan Brearley, boss of the energy regulator Ofgem, announced today that a “social tariff” system is being discussed with ministers. It would involve offering groups of vulnerable people on low incomes a lower unit price for their energy, although it’s not yet clear whether the discount would be paid for by suppliers (by upping other customers’ bills) or through general taxation.

National Grid, meanwhile, trialled a scheme this evening to pay households to reduce their energy consumption during peak times, to lessen the strain on Britain’s electricity infrastructure. Up to a million households with smart meters benefitted from the trial which ran between 5pm and 6pm. National Grid says savings could range from a few pounds to as much as £20 depending on the amount of energy shifted to a different time.

With a big question mark hanging over the UK’s economic fate and energy prices still well above the long-run average, innovative solutions like these could make all the difference.

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