Inflation Still High But No Recession Just Yet
According to the Office for National Statistics (ONS), the UK economy didn’t grow or shrink in the last quarter of 2022. This comes after a 0.3% shrinkage the previous quarter, meaning the country has narrowly avoided going into recession. Jeremy Hunt and Andrew Bailey both warn that the danger isn’t over because of high levels of inflation still present. Technically, a country is only in recession if it has two consecutive quarters of negative growth.
Despite a series of unprecedented public sector strikes at the end of 2022 and the beginning of 2023, growth hasn’t fallen as sharply as some predictions. However, the total growth of the economy in 2022 was only 4.1%, compared to 7.4% in 2021. During that time, a global pandemic had hit and the energy crisis has also exacerbated sky-high prices, culminating in a period of cost of living nightmares.
Inflation has kept persistently high, which is why the Bank of England raised interest rates for the tenth time in a row earlier this month. The next review is due in late March. In a bid to curb inflation getting out of hand, the Bank Rate has been raised to the highest rate since 2008 in the midst of the global financial crisis. This has had the added effect of increasing mortgage rates and loan repayments, causing a knock-on effect to the cost of living crisis as households tighten their belts again.
The Bank Rate is meant to curb inflation by encouraging saving over spending. By making borrowing (on mortgages and loans) more expensive, people are more drawn to higher saving rates instead, putting money away instead of spending more in the economy. With high levels of spend in the economy, the cost of goods and services steadily rises. With less spending, slower price rises occur, cooling inflation down.
The government has set a target of halving inflation this year, mainly to try and keep itself in power when the next general election comes about. The Bank of England predicted the UK economy to shrink every quarter of 2023, giving a dismal overview of an impending recession, but the official statistics from the ONS show that this might not be the case. Even the IMF predicted the UK economy to be the only G7 country to have negative growth this year, but this was based on how the economy hasn’t yet returned to pre-pandemic levels.
GDP still remains 0.8% below 2019 levels, according to the ONS, despite what some MPs might argue. The UK is therefore the only G7 country not to have returned to pre-pandemic levels of growth. Economists and organisations alike have been predicting a recession due to many factors, including high inflation and interest rates.
There have been fresh calls for the government to apply windfall taxes on the exorbitant profits oil and gas giants have reaped while the rest of the country has been suffering the brunt of the cost of living crisis. Such a move is believed to bring in enough funds to help with the energy crisis and mitigate the worst of the effects households are enduring.
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