Yahoo Finance UK at risk of recession as cost of living and inflation surge
The UK economy is at significant risk of being pushed into a recession next year as runaway inflation takes its toll, according to KPMG.
The accountancy firm said in its UK Economic Outlook report that there was around a 50% chance of the UK being tipped into a “mild recession”.
Read more: UK’s income gap exposes tale of two Britains
GDP growth is forecast to more than halve to 3.2% this year, from 7.4% in 2021, and fall to 0.7% in 2023.
KMPG said the three key headwinds facing the UK economy were a potential US recession resulting from aggressive interest rate rises by the US Fed, a potential Eurozone recession due to interruptions of gas supplies from Russia and an ongoing and tightening squeeze on UK household incomes leading to a sharp drop in household consumption.
“We expect supply issues to gradually ease during the course of this year, although headwinds in the form of a potential deterioration in Russian energy supply or further lockdowns in China as a result of its zero COVID policy could worsen the outlook,” Yael Selfin, chief UK economist at KPMG, said.
“Combined with the pressures on household budgets, the Monetary Policy Committee will have to weigh the risk of high inflation spilling into pay growth against the risk of a recession,” she added.
The UK’s manufacturing and financial services sectors would be among the worst hit by a recession. Banks could see significant losses from a downturn, as falling incomes and rising inflation left more families unable to repay debts.
“The cost of living crisis and rising tax burden have led to a fall in consumer confidence which is set to drag on spending,” the report said. “Business investment is expected to be weak next year without government support.”
Read more: Cost of living crisis: Over 10 million households to struggle with paying bills
Prices are now expected to rise by an average of 8.1%, up from 7.9% forecast in its April report, and four times the Bank of England’s target.
KPMG warned that the risks of the UK falling into a recession are skewed to the downside: “A sharper deterioration in the external environment — causing a recession in some of the UK’s major trading partners — coupled with a stronger fall in consumer spending in the UK, could see the UK economy entering a mild recession next year.”
The Bank for International Settlements (BIS) has also warned that the world is on the “tipping point” of falling into a period of runaway inflation in which soaring prices become embedded and difficult to control.
