International Finance

IF Insights: Crisis-ridden United Kingdom is now staring at a recession

IFM_United Kingdom Recession

United Kingdom Prime Minister Rishi Sunak has been warned about the prospects of his country being in a recession in 2024, as stubbornly high inflation has pushed interest rates to over 5%.

As per the Office for National Statistics (ONS), United Kingdom’s inflation has fallen to 8.7% in April 2023, down from 10.1% in March. Since 2022 summer of 2022, it has been for the first time that the inflation ratio is going down below the double-digit mark. However, the latest ratio is well above the Bank of England’s 2% target.

Economists fear that another round of BoE monetary policy tightening will result in the rise of the borrowing costs of mortgages and loans, resulting in the country entering into a recession. A recent economic outlook from the ratings agency Moody’s has also predicted a similar trend.

Knowing The Exact Picture

The International Monetary Fund (IMF) has remarked that the United Kingdom economy is expected to avoid a recession in 2023, whereas the European country’s GDP will grow by 0.4% in 2023.

However, the IMF also cautioned about the “stubbornly” high inflation.

The IMF also noted that the biggest danger for the UK economy would be coming from a “greater-than-anticipated persistence in price-and-wage-setting”, which would keep inflation higher for longer.

It also predicted that inflation will not return to the Bank of England’s 2% target until mid-2025.

The Bank has put up interest rates 12 times in a row to bring down inflation and expects the trend to continue further.

As of now, UK GDP has registered a 0.1% growth in the first three months of 2023. However, ONS stats also suggest that the European country’s economy remained 0.5% smaller than its size in the fourth quarter of 2019.

BoE predicts Britain’s GDP growth pace at 0.25% for 2023, just enough to avoid a recession.

Country Facing Its Worst Wave Of Industrial Strikes

Britain has remained the only G7 economy yet to regain its pre-COVID GDP growth size.

Chancellor Jeremy Hunt has hiked the corporation tax from 19% to 25%, apart from introducing tax breaks that will allow companies to offset every pound invested in equipment, plant and machinery against taxable profits till 2026.

However, inflation is fast eroding pay scales and worsening the cost of living crisis further.

Over 133,000 civil servants are reportedly protesting for not receiving inflation-adjusted salaries. Transport workers, healthcare staff, and BBC journalists, all are on the protest path.

The country is facing its worst wave of strikes since the 1990s. While economists are batting for a boost in public sector spending, from June to December 2022 alone, the United Kingdom economy lost nearly 2.5 million working days to strikes.

A Neck-Breaking Price Rise

Data from the British Retail Consortium (BRC) suggests that the annual food inflation eased from 15.7% to 15.4% in May 2023.

The price of sausages, milk, cheese and eggs saw a growth slump from 17.8% to 17.2%, a minuscule 0.6% decrease.

The Bank of England has now raised its inflation estimate in response to predictions that food prices would remain elevated throughout 2023. The overall inflation is likely to be above 5%.

Non-food inflation had hit 5.8% in May 2023, 0.1% above the three-month average of 5.7%. So far, United Kingdom retailers have increased prices by 9%.

Consumers are now saving money by opting for high street seasonal promotions and the price reductions offered by supermarket loyalty schemes.

Ministers are reportedly working with supermarkets to voluntarily cap food item prices, a move reminiscent of the 1970s-style price controls.

Mortgage storm to rock housing market?

As per Nationwide data, house prices in the United Kingdom have gone down again, after a brief recovery in April 2023. The prices fell by 0.1% in May 2023 after a 0.4% increase in April.

On an annual basis, property prices fell by 3.4% in May 2023, compared with the 2.7% fall in the previous month.

As inflation remains high (or better to call it neck-breaking), bond yields have also risen since May 2023. Lenders have in turn increased the mortgage rates in anticipation of further BoE rate hikes. As per Nationwide’s chief economist Robert Gardner, the housing market’s situation will deteriorate further, with the inflation slowdown pace not meeting the analysts’ and investors’ expectations either.

On May 2023 alone, all the major British lenders had to raise mortgage rates. Smaller property players withdrew products in response to soaring interest rates.

Nationwide has already announced raising its mortgage rates on selected and tracker products by up to 0.45% point. As per Goodbody banking analyst John Cronin, the move will likely be emulated in the coming days by other lenders.

“One way or the other, loan customers are going to suffer higher pricing as far as I see which will adversely impact credit demand,” Cronin added, while interacting with the ‘Realty+’.

The last time mortgage rates in the United Kingdom saw massive spikes was in the period between October-November 2022, when the market reacted negatively to Liz Truss’ ‘mini Budget’.


Households have been under pressure from the fastest annual rise in food prices since the late 1970s. The Rishi Sunak government has set an ambitious goal of halving the inflation ratio by the 2023-end. The only way to ensure it is by tightening the BoE monetary policy further.

However, that is resulting in an upward mortgage rate. With the incomes falling, Brits are hesitant to go for property investments.

“While any fall in prices is good news for house hunters, it might not be enough to meaningfully offset the rising interest rate and its contribution to monthly mortgage payments. The stark reality is owning a home appears to be a distant dream for many, with high mortgage rate rates, high property prices and a higher cost of living, including climbing rents, making buying a home an increasingly difficult prospect,” commented Myron Jobson, senior personal finance analyst at interactive investor, while interacting with the Guardian.

While the Eurozone is now showing signs of inflation easing out, the situation in the UK has been a contrasting one so far.

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