UK to enter recession this year, think-tank NIESR forecasts

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FILE PHOTO: A view of the London skyline shows the City of London financial district, seen from St Paul’s Cathedral in London, Britain February 25, 2017.

LONDON (Reuters) – Britain is on course to enter a technical recession in the second half of this year and faces a big hit to living standards from surging prices, an economic think-tank said on Wednesday.

The National Institute of Economic and Social Research (NIESR) forecast gross domestic product will fall by 0.2% in the third quarter and 0.4% in the last three months of the year.

That would mark two consecutive quarters of contraction, a commonly used definition of recession.

“Times are difficult for the UK economy,” said NIESR’s deputy director for macroeconomics, Stephen Millard, a former Bank of England economist.

NIESR said the downturn would not count as a recession on its preferred definition – similar to that used by the United States’ National Bureau of Economic Research – which requires a more sustained contraction.

Last week the Bank of England forecast Britain’s economy would shrink by up to 1% in the final quarter of this year and also contract over 2023 as a whole – but not that it would shrink for two consecutive quarters.

NIESR estimates Russia’s invasion of Ukraine will knock 1.1% or $1.5 trillion off world economic output this year – roughly the equivalent of an economy the size of Australia’s.

NIESR cut its UK growth forecast for 2022 to 3.5% from 4.8%, and downgraded its 2023 forecast to 0.8% from 1.3% – though this is stronger than the BoE’s outlook which forecast a 0.25% contraction in 2023.

Consumer price inflation was likely to peak at 8.3%, lower than the BoE’s forecast of more than 10% as NIESR does not expect energy prices to rise as much as the BoE does. It also sees a bigger dampener on inflation from falling output and rising unemployment.

But the government should raise its main welfare benefit for the unemployed and low-paid – Universal Credit – by 25 pounds ($31) a week to help offset surging bills, and give a 250-pound grant to the poorest 40% of households, it said.

Finance minister Rishi Sunak scrapped a temporary 20-pound COVID-related increase to universal credit in October.

NIESR’s proposals would cost 4.2 billion pounds, compared with the 20 billion pounds of headroom which Sunak has relative to his self-imposed fiscal rules.

Sunak said two weeks ago it would be “silly” to offer more support now and he wants to wait until later in the year when the economic outlook would be clearer.

But Prime Minister Boris Johnson told parliament on Tuesday that the government would have more to say in the coming days on cost of living support.

NIESR estimated around 1.5 million British households – about 5% of the total – would soon face bills for food and energy which exceed their disposable income after housing costs.

“The impact on those households could easily be reduced with no deterioration in the medium-term sustainability of our fiscal position,” NIESR director Jagjit Chadha said. ($1 = 0.8114 pounds)