Is Britain set for recession or not?


The International Monetary Fund’s U-turn on predictions of a looming UK recession was cheered earlier this month, but a major credit agency has brought those fears back under the spotlight.

The IMF was joined by the Bank of England last month in reassessing its outlook for the UK economy, upgrading predictions of a recession to marginal overall growth for 2023.

But this week Moody’s warned Britain would join a handful of other advanced economies in suffering a ‘mild recession’ this year.

City forecasters are still split on the possibility of a recession, which is an outlook most say hinges on the future for BoE interest rate hikes – with bond markets now pricing a worrying peak of 5.5 per cent from their current level of 4.5 per cent.

While headlines often focus on the effect on the mortgage market of rising rates, businesses are also facing much higher costs on borrowing and bonds. 

All eyes on the Bank of England's next steps

All eyes on the Bank of England’s next steps 

Moody’s highlighted ‘strong inflation momentum’, with core consumer price inflation clocking in at a 31-year high of 6.8 per cent in April, alongside unimpressive UK economic activity in its assessment of the country’s prospects.

This combination, according to the credit agency, will mean the BoE hiking ‘at least’ one more time by 25 basis points to 4.75 per cent.

Moody’s said: ‘We expect the economy to contract 0.1 per cent in 2023 as the impact of higher prices and tighter financing conditions continues to feed through the economy.

‘Monetary policy…[will] remain tight over the coming years, which will weigh on consumption and investment.

‘The UK’s relatively short-dated mortgage market means that around half of outstanding mortgages have a floating rate or will need to be refinanced at higher rates this year, which will reduce household disposable income.’

The increase in mortgage costs for an average mortgage holder having to refinance at current rates would reduce disposable income by 7.5 per cent on average, according to the Institute for Fiscal Studies.

Core services inflation is at a three-decade high and the BoE has hiked base rate 13 times in an attempt to get it under control

Core services inflation is at a three-decade high and the BoE has hiked base rate 13 times in an attempt to get it under control

The technical definition of recession would require the UK to experience two consecutive quarters of negative GDP growth.

The economy grew by 0.1 per cent in the first quarter of this year, despite a 0.3 per cent fall in March, according to the Office for National Statistics.

But Britain will not be alone among peers in its ‘mild’ recessionary fate, according to Moody’s, which predicts the same for the US and Germany, as well as ‘stagnant economic activity’ in France and Italy.

It said: ‘Tight financing conditions will lead to a downshift in global economic growth in the second half of this year and contain recovery in 2024.

‘Economic growth is decelerating across G-20 economies but at differing speeds.

‘We expect very weak growth in key advanced economies in particular.’

The most recently available figures compiled by HM Treasury show City forecasters on average expect UK GDP to shrink by just 0.1 per cent in 2023, before growing by a meagre 0.8 per cent next year.

However, there is disagreement, with the scale ranging from Economic Perspectives’ forecast of a 1.5 per cent slump in GDP this year and growth of 0.7 per cent as forecast by JP Morgan.

The pace of growth is slowing across advanced nations, but Germany and the UK are the laggards

The pace of growth is slowing across advanced nations, but Germany and the UK are the laggards 

It’s not just homeowners suffering, businesses are too

Thomas Pugh, economist at RSM UK, said the group had started to see middle market businesses ‘struggling with the availability and affordability of credit’ as interest rates rise

The average cost of new borrowing from banks by UK private non-financial corporations ballooned to an effective interest rate of 5.99 per cent in April, according to RSM UK.

Pugh added: ‘Our modelling suggests that if the base rate rises to 5.5 per cent, as now being priced in by financial markets, this would be enough to tip the economy into recession.

‘Overall, there are reasons to be optimistic about the second half of the year. Inflation should halve by the end of the year and households’ real incomes should start to rise again.

‘However, the big risk is that the lagged effect of the huge rise in interest rates that has already happened, combined with the risk of further rate rises tips the economy into recession later this year or in early.’

Michael Hewson, chief market analyst at CMC Markets, agreed that BoE policy will be all important, warning the bank ‘is in the invidious position of having no good options’.

He said: ‘Do nothing and inflation will take longer to work its way out of the system, squeezing consumers further, raise by 25bps to at least show they are trying to do something, or be more aggressive and push the economy into recession.’

‘While [the BoE’s economic growth forecast upgrade] is welcome news, it is also important to remember that just over six months ago, the bank was predicting a two-year recession, so their track record is not particularly great.’

Germany has already entered a mild recession but forecasters are split on the UK's fate

Germany has already entered a mild recession but forecasters are split on the UK’s fate 

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