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Minimising the impacts of a potential recession

Author: ICAEW Insights

Published: 13 Sep 2022

The UK faces a perfect storm of economic challenges, from energy prices and inflation to post-Brexit export issues. Can we stave them off?

In peak summer, as most Britons were either on holiday or daydreaming of an imminent holiday, the Bank of England (BoE) forecast that the UK economy was likely to enter a recession in the final quarter of this year, predicting that inflation would leap to just over 13% in the final months of 2022.

According to the BoE’s Monetary Policy Report published in August, “The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”

Liz Truss, the UK’s new Prime Minister, hit back against the bank’s prediction of an imminent recession at a Sky News leadership debate, saying: “It’s extremely worrying but it’s not inevitable. We can change the outcome and make it more likely the economy grows.”

Although Truss is downplaying the dire economic outlook, many economists agree with the BoE that the UK economy is set to enter a downturn. Yael Selfin, Chief Economist at KPMG UK and a Fellow at the National Institute of Economic and Social Research, says: “It is quite likely we will have a recession. Although it may not be as severe as most of the past recessions we had.”

Economists say that the most immediate problems facing the UK economy – escalating energy prices, rising inflation, the squeeze on purchasing power and company earnings – are short term. Nonetheless, they argue there is a clear need for action now.

“It is important that whatever the government does, it focuses on who will need help most. It should preferably be targeted,” Selfin says. And while she believes that help to tackle rising energy bills won’t stave off a recession, “it will help partially shield those who are most vulnerable”.

Martin Beck, Chief Economic Adviser to the EY ITEM club, says that the UK economy retains some positives, such as record low unemployment, millions of job vacancies and strong household savings among the more well heeled. As long as the government protects the most vulnerable households, Beck says, the downturn may not prove to be as painful as predicted.

But tax cuts may not be the answer. In its August report, the BoE states that the economy is operating at full capacity. In order to bring down inflation over the next two years, the bank needs to weaken growth. 

“If the Bank of England is saying that demand is too strong and then you have measures that go out and deliberately increase demand significantly, then that’s probably going to result in higher interest rates,” says Ian Stewart, Chief Economist at Deloitte. “Across-the-board tax cuts, although they would stimulate demand, might complicate the job of the Bank of England. And it would also mean broad support going to people who would be relatively well positioned to cope with higher energy bills.”

Beyond the immediate help millions of households need to pay for rising energy bills over the next 18 months, economists say there are major longer-term measures the government needs to take to recover from recession. “The government also needs to look at fundamental longer-term issues in the economy. One of them is that we have very weak business investment. Businesses need more certainty and stability. They need to know that whatever they use for their planning now, they can count on it going forward,” Selfin says.

Another area of focus is in unblocking exports. UK exports have been falling since the UK exited the European Union, and the logjam over the Northern Ireland Protocol remains unresolved. “One consideration is whether the government support extends to a business support package as well. There’s an argument for the focus to not just be purely on households,” Beck says.

Training and development also need greater investment. Unless the government sets out a clear and simple policy, businesses will put off investing. With labour shortages set to continue into the future and the third industrial revolution taking hold, this should be a priority for the government.

Stewart says one of the obvious approaches to boost the labour force is upskilling. “In-work training, further education and vocational training are all vital, but making the most of these requires coordinated action by companies and the government.” 

Despite the economic uncertainty over the next few months, most economists say there is much the government can do in the short term to ease the pain. But even if the recession isn’t as deep as predicted, the UK economy needs a significant overhaul to boost productivity and growth in the long term.

Selfin says: “Next summer, hopefully, we will have emerged from the recession and the spike in inflation. But that will not be the end of the challenges for the UK economy.”

Jumpstarting the Economy

Supply chain challenges, rising energy costs and global volatility are threatening to kickstart a recession. However, we examine the changes in technology, education and economic markets which could help keep the country on track.

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