Britain could slide into a recession this autumn, Ernst & Young’s chief UK economist warned today.
Peter Arnold said in an interview with Proactive that there is a “risk of a recession or what might feel like a recession as we hit the autumn”.
“I do think there is a risk of recession,” he said, clarifying that even in such an event the country could bounce back quickly.
“The labour market is still very strong. While employed, [people are] still able to spend.
"Households built up a stock of savings, paid down debt or reduced borrowing [during the pandemic, providing a] financial cushion.
"There’s a risk we might see high inflation [and a] tougher economic environment.”
A recession is broadly defined as two or more consecutive quarters of negative growth.
Although the pace of gross domestic product growth slowed in the first quarter it has so far not yet tipped into a recession since a brief dip during the pandemic.
In 2020, the UK economy contracted by 2.5% in the first quarter and productivity fell a further 19.4% sequentially in the following three months, according to data from the Office for National Statistics.
Energy and food prices have been rising at pace and unabated increases, combined with the threat of a full embargo on Russian gas, would represent the worst-case scenario for Britain.
While EY’s base case forecast is that the country will narrowly avoid recession, Arnold said the fourth quarter and first quarter of next year are “where we see the slowest growth”.
“There’s no doubt winter will be difficult, primarily around energy usage currently.
"We’re currently not using heating and lighting as much. Come the autumn, people will be more reliant on heating and electricity, energy price rises will start to bite.
"Consumers will find their wallets squeezed,” Arnold said.
To remain profitable, consumer-facing companies will need to balance pricing versus cost and profits, and consider taking lower margins to maintain volume, he added.
Despite consecutive increases in the base rate of interest, the Bank of England is being cautious not to raise interest rates too quickly.
The base rate currently stands at 1.25% and estimates are that the central bank will raise interest rates to up to around 2% by the end of the year.
“The bank has indicated that it could consider raising by 50 basis points in August and send a signal to the market that it is taking inflation more seriously,” said Arnold.
"There's a trade-off and a risk of bringing [the] economy into recession."