UK economy faces recession risk, think tank warns of lost growth

UK Economy at Risk of Recession, Warns Think Tank

The UK economy is facing the risk of a recession in the near future, with economists predicting five years of lost economic growth. The National Institute of Economic and Social Research (NIESR) has projected that it will take until the third quarter of 2024 for the UK's output to return to pre-pandemic levels. Additionally, the think tank has highlighted a 60% risk of the government going to the polls during a recession. The country's cost of living crisis has particularly impacted the poorest households, who would need an income boost of £4,000 per year to maintain their pre-pandemic living standards. Jagjit Chadha, the NIESR's director, has expressed concerns about a return to the "British disease" of the 1970s, characterized by high inflation and weak growth. While the think tank believes the UK will avoid a recession this year, it expects the economy to grow by just 0.4%. The impact of the Bank of England's consecutive interest rate increases, bringing rates to 5.25%, is expected to result in even more modest growth of 0.3% in 2024.

Rishi Sunak's Dilemma over Early Election

The warning of a potential recession next year has added to the dilemma faced by Rishi Sunak, the UK's Chancellor of the Exchequer, regarding whether to call an early general election. The NIESR's report has increased pressure on Sunak, suggesting that the economy could suffer another blow just as the prime minister plans to go to the country. Under election rules, the next general election must be called no later than January 2025. Some senior members of the Conservative Party have proposed that Sunak should consider an early election, possibly in May next year when local elections are scheduled to take place. They argue that an early election could help minimize losses for the party, which has been trailing behind the Labour Party in the polls. However, there are also concerns that waiting for an election could allow cost of living pressures, such as inflation and energy prices, to subside and potentially improve the Conservatives' prospects.

Stuttering Growth and Widening Inequalities

The NIESR's report also highlights the challenges facing the UK economy over the next two years, including "stuttering growth" and widening inequalities. The think tank predicts that the economy will only recover to its pre-pandemic level in the third quarter of 2024. It attributes the slow growth to a combination of factors, including the triple supply shocks of Brexit, the Covid-19 pandemic, and the Russian invasion of Ukraine. The tightening of monetary policy to bring down inflation has also had a negative impact on the economy. The report reveals that wage growth has been fastest in London, while the West Midlands has experienced a fall in real wages. The poorest households have been hit hardest by falling real wages and persistent inflation, leading to lower disposable incomes and increasing levels of unsecured debt. The NIESR warns that addressing the UK's poor growth performance will be a key challenge for policymakers as the next election approaches.