The UK economy unexpectedly shrank in March and the first quarter of the year. This is putting
the British government under pressure to increase its support for inflation-hit households. The risks of a recession in the UK are growing as the economy remains at risk. The following are some factors you should keep in mind. Read on to find out more.
Economic escalation scenario
The UK has not yet hit the cliff edge of recession, but the risks of inflation and the Brexit crisis have made the country's growth prospects look precarious. A recent report from PwC and Deutsche Bank said the UK is still at risk of recession. However, the government has been trying to reduce the risk by ensuring that it has the capacity to pay its bills. In addition, the UK's exports to Russia are among its most important commodities.
The recent events in Ukraine have raised the risk of geopolitical uncertainty, and the conflict may extend to NATO's borders or even to more active backing of Russia by China. As a result, the risk of recession is rising, with some business leaders are estimating the probability of a recession at 50%. Inflation is rising and monetary policy in the US may not be the answer, which could further harm growth. In addition, new increases in COVID-19 cases remain in the frame.
Nonetheless, the COVID-19 outbreak has underlined the importance of mitigating national uncertainty. Furthermore, recent economic research has shown that high levels of uncertainty adversely affect the commodities, financial, housing, and debt markets. Therefore, a severe approach is needed to reduce uncertainty. This is especially true for the UK economy, which has the highest risk of recession. There are many reasons why uncertainty should be reduced, and these factors can include the following:
The strength of the UK economy is closely linked to the amount of money saved by households during the pandemic. As a result, close to £250bn was accumulated during the lockdown, although most of this money was held by the wealthier households. As prices rise, those families facing the worst effects will be hit the hardest. However, economist Thomas Pugh, a senior partner at accountancy firm RSM UK, said that despite the low household savings rate, Britain's economy has staged a "V-shaped recovery" and is on track to outpace every nation in the G7 for the second consecutive year in 2022.
The UK economy is facing heightened risks of recession and inflation. While the unemployment rate has fallen to 3.8% in the three months to February 2022, the number of 'inactive' working-age people is now 490,000 higher than two years ago, and rising numbers of people are taking early retirement and long-term sick leave. Despite this, employment levels have fallen by half a million from pre-pandemic levels. Despite the current high level of unemployment, the central forecast of the EY ITEM Club suggests that the UK economy is not likely to fall into recession until later this year. The increase in bills will likely hit households even harder, which may put more pressure on consumers' budgets.
War in Ukraine
While there is no evidence that the conflict in Ukraine will cause a recession in the UK, it has shaken up the region and world economy. Moreover, the Russian invasion of Ukraine has disrupted supply chains, thereby boosting inflation. The United States is already facing a recession threat. The yield curve of U.S. government debt is pretty flat between 3 years and 10 years which shows the markets are lacking confidence of growth over that period. There remains a lot of uncertainty on Fed interest rate policy for the remainder of 2022.
The war has already disrupted food production and distribution in Ukraine. Ukraine is a major producer of wheat. In addition, it is affected by a heavily-fought port called Mykolaiv. If this port closes, food prices could rise significantly. This would be particularly bad for the UK, which imports around 85 percent of its wheat. This disruption could significantly increase food prices worldwide. However, the conflict has a negative impact on the global economy and has heightened volatility in global financial markets.