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

By David Milliken

LONDON (Reuters) – Britain is heading in the right direction to enter a technical recession within the second half of this yr and faces a giant hit to dwelling requirements from surging costs, an financial think-tank stated on Wednesday.

The Nationwide Institute of Financial and Social Analysis (NIESR) forecast gross home product will fall by 0.2% within the third quarter and 0.4% within the final three months of the yr.

That might mark two consecutive quarters of contraction, a generally used definition of recession.

“Occasions are tough for the UK financial system,” stated NIESR’s deputy director for macroeconomics, Stephen Millard, a former Financial institution of England economist.

NIESR stated the downturn wouldn’t rely as a recession on its most popular definition – just like that utilized by the USA’ Nationwide Bureau of Financial Analysis – which requires a extra sustained contraction.

Final week the Financial institution of England forecast Britain’s financial system would shrink by as much as 1% within the last quarter of this yr and likewise contract over 2023 as a complete – however not that it might shrink for 2 consecutive quarters.

NIESR estimates Russia’s invasion of Ukraine will knock 1.1% or $1.5 trillion off world financial output this yr – roughly the equal of an financial system the dimensions of Australia’s.

NIESR reduce its UK development forecast for 2022 to three.5% from 4.8%, and downgraded its 2023 forecast to 0.8% from 1.3% – although that is stronger than the BoE’s outlook which forecast a 0.25% contraction in 2023.

Shopper value inflation was more likely to peak at 8.3%, decrease than the BoE’s forecast of greater than 10% as NIESR doesn’t count on vitality costs to rise as a lot because the BoE does. It additionally sees a much bigger dampener on inflation from falling output and rising unemployment.

However the authorities ought to elevate its principal welfare profit for the unemployed and low-paid – Common Credit score – by 25 kilos ($31) every week to assist offset surging payments, and provides a 250-pound grant to the poorest 40% of households, it stated.

Finance minister Rishi Sunak scrapped a brief 20-pound COVID-related improve to common credit score in October.

NIESR’s proposals would price 4.2 billion kilos, in contrast with the 20 billion kilos of headroom which Sunak has relative to his self-imposed fiscal guidelines.

Sunak stated two weeks in the past it might be “foolish” to supply extra assist now and he needs to attend till later within the yr when the financial outlook could be clearer.

However Prime Minister Boris Johnson instructed parliament on Tuesday that the federal government would have extra to say within the coming days on price of dwelling assist.

NIESR estimated round 1.5 million British households – about 5% of the whole – would quickly face payments for meals and vitality which exceed their disposable earnings after housing prices.

“The impression on these households might simply be lowered with no deterioration within the medium-term sustainability of our fiscal place,” NIESR director Jagjit Chadha stated.

($1 = 0.8114 kilos)

(Reporting by David Milliken; Enhancing by William Schomberg)