Analysis: UK slips into recession, increasing pressure on next PM to help

LONDON (Reuters) – Britain’s slide into recession has gained momentum after data this week showed inflation jumped above 10 percent, wages lagged well behind price growth and consumer confidence has sunk to an all-time low.

The deteriorating outlook for the world’s fifth-largest economy comes after the Bank of England warned this month of a 15-month contraction since the end of this year, worse than the outlook for other major European economies and of the United States.

Stronger-than-expected public debt figures on Friday underlined the tough decisions facing the next prime minister on how to extend aid to the poorest households, which has so far fallen short of the support of most other governments Europeans

The gamble was exposed by a warning from public health providers that Britain was facing a “humanitarian crisis” as rising energy prices put many poorer Britons at risk of physical and mental illnesses.

“Many people could face the terrible choice between skipping meals to heat their homes and having to live in cold, wet and very unpleasant conditions,” said Matthew Taylor, chief executive of the NHS Confederation.

The scale of the impact on households on their energy bills will become clearer next Friday when regulators announce the latest cap on electricity and gas rates, which have risen since the Russian invasion of Ukraine

Already nearly double levels from a year ago, rates could double again early next year.

Next week’s announcement comes against the backdrop of a record fall in wages, excluding bonuses and adjusted for rising inflation to 10.1%, its highest level since 1982

Consumers eased the flow of bad economic news as data on Friday showed retail sales volumes rose unexpectedly in July.

However, the increase was largely driven by online discounting, and real-time figures for debit and credit card spending have shown a big drop in spending at the start of August.

Retailers say they are already in crisis mode.

“For many businesses, 2022 is proving to be as challenging as the pandemic,” said Helen Dickinson, chief executive of the British Retail Consortium.

BANK OF ENGLAND IN ONE POUND

Rising inflation and the Bank of England’s forecast of a long, if relatively shallow, recession have added to the dilemma facing the central bank.

It has already raised interest rates six times since December, slowing the economy’s momentum, but signs of rising inflationary pressures have prompted economists to raise their forecasts for further rises in borrowing costs.

Analysts at Investec said on Friday they now expect the BoE to raise rates by half a percentage point for the second straight time in September, followed by a final quarter-point increase in November, before cutting rates in 2023 to ease the recession.

Investors are also raising their bets on higher borrowing costs in the UK.

Yields on two-year British government bonds on Friday hit their highest since November 2008, midway through the global financial crisis, and the spread over equivalent German bonds was the widest since March this year .

With the BoE determined to show its critics it will control inflation by raising rates, the focus is on who wins the race to replace Boris Johnson as prime minister next month.

The front-runner, Foreign Secretary Liz Truss, has said she will cut taxes. The other contender, former finance minister Rishi Sunak, says this risks fueling inflation. He prefers more direct and more specific support.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, estimates that if Truss wins, the budget deficit could reach 170 billion pounds ($201.18 billion) in the current financial year.

This would be an increase from £144bn last year and triple its pre-pandemic size, but smaller than the £309bn loan in 2020/21 during the depths of the coronavirus crisis.

A significant additional loan looks likely whoever enters Downing Street.

Andrew Goodwin, chief UK economist at Oxford Economics, said that as long as the support measures were temporary, they would not affect the UK’s long-term fiscal outlook.

“There’s a lot of room for the next prime minister to offer that support, and ultimately if they don’t, that’s a political choice,” Goodwin said. “It is not something that is forced on them by public finances.”

(Writing by William Schomberg; Editing by Susan Fenton)

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