A new forecast has warned that the UK may likely face a recession in the next three quarters although the risk of a severe economic crisis has been cut down somewhat by the Government’s quick intervention on energy bills.

Despite the Government’s efforts, however, rising interest rates, elevated inflation, high energy prices and the bleak global economy could mean that the UK economy could remain in recession up until mid-2023.

When is the likely to pull out of this UK recession?

Are we in a recession UK? According to a recent S&P Global report, the UK has already been in a full-year recession, further highlighting that the country is in the middle of a moderate four-quarter recession which started in the second quarter of 2022.

Households continue to face inflation at around 10% which is expected to rise further at the turn of the winter season, dwarfing consumer spending in the upcoming quarters.

However, S&P Global also expects that the Bank of England will respond to the crisis by increasing interest rates from the current 2.25% rate to 3.25% by February next year – this should significantly ‘cool off’ the economy so that inflation can fall back towards the target 2% during the medium term.

Not particularly encouraging is the fact that the pound reached an all-time low against the dollar recently as UK gilt yields soared, thanks to the controversial “mini budget” announcement and subsequent U-turn.

When or how is the UK going to pull itself out of recession?

Unfortunately, the Bank of England has reported that the UK is headed for its longest recession in the last century. The central bank expects GDP to fall continually throughout 2023 and even the first two quarters of 2024.

How will it affect businesses?

This projected two-year downturn can be very challenging indeed according to the Bank of England, which is likely to cost around half a million jobs, putting pinched households and businesses under more pressure.

The worst effects of the forthcoming economic downturn will likely be felt by the first or second quarter of 2023. More than 35% of UK hospitality business, for example, say that they are facing the risk of closure in early 2023 due to out-of-control costs, weakened consumer spending and high energy bills.

Tina McKenzie, Chair of Policy and Advocacy for Federation of Small Businesses, has said that many businesses are simply aiming to survive through the Christmas rush over and will then likely close their doors as early as January. In fact, most businesses in hospitality and retail, for instance, are simply biding their time and do not see any silver lining at all.

UK business owners are looking forward to the much anticipated Autumn Statement due on November 17, during which current Finance Minister Jeremy Hunt is expected to announce £60b worth of spending cuts and tax hikes, in order to give the nation’s battered public finances a much needed sigh of relief.

However, many also worry that the Treasury may go to extremes in its bid to recover the country’s economic status – bleak as it was thanks to Liz Truss’ rushed mini-budget – that struggling industries may be further troubled and that it would stun economic growth as a whole.

Early drafts of the Government’s plan indicate up to £35b worth of spending cuts and approximately £25b worth of tax rises.

Is there a silver lining?

As the squeeze eases on real incomes from high inflation, the cheap pound encourages exports, the tax cuts go into effect, and the tightening cycle for interest rates comes to an end, GDP should show signs of growth by mid-2023. The economy is then expected to grow by 2.4% in 2024 and likely 2.3% in 2025.

The UK economy unquestionably faces a tough period ahead, especially with global headwinds contributing to the mounting domestic pressures.

However, the silver lining is that the intervention on energy bills is most likely going to ease the downturn, while the latest ONS (Office for National Statistics) data indicates that households now have access to a larger pool of pandemic savings than previously estimated.

With that said, there are still significant risks for the UK economy that loom ahead, with the potential for more global instability which is going to inevitably create further drags on growth.

Businesses in particular will need to be very resilient and come up with different contingency plans, while also being mindful of how they support their employees and customers throughout the tough economic quarters ahead.

The energy support package was expected to tame inflation a little which peaked at just under 11% in October – which could have been a peak inflation of around 15% had it not been for the intervention on energy bills.

Still, annual inflation will likely outdo wage growth until 2024 – people will start to see their disposable incomes shrink noticeably as a result. In fact, household incomes will likely decline in the next year to the greatest level since the 1970s.

With all things said, inflation is expected to hover around 8.9% on average until the end of this year, around 5.5% in 2023 and around 1.8% in 2024, which is just under the Bank of England’s 2% target.

Unemployment may modestly rise while consumer spending and house prices are expected to fall in 2023. Consumer spending was expected to grow by 4.1% in 2022 and 0.8% in 2023, respectively – however, according to the latest forecast, this has now risen by 4.9% in 2022 and will fall by 0.7% in 2023.

Despite the UK recession, the unemployment rate may peak at no more than 5% on average, which is actually much lower compared to previous recessions.

House prices may rise by 9.1% on average up until the end of 2022 followed by a 4% decline in 2023.

Final thoughts

We’re headed into what could be the longest UK recession ever. But does this spell all gloom and doom for all businesses, consumers and households across the board? Likely not, especially if businesses and households alike can weather the storm for now, we may see a silver lining a lot sooner than expected.