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Could the UK avoid recession this year?

Could the UK avoid recession this year?

In May four guests had been summoned by the prime minister to debate the merits of various economic stimulus packages, and the impact such measures may have on inflation.

The four were Gerard Lyons, chief economic strategist at Netwealth; Lord Mervyn King, former Bank of England governor; Rupert Harrison, former adviser to George Osborne and chief strategist for multi-asset at BlackRock; and Minouche Shafik, director at the London School of Economics. 

The debate that had been raging in the corridors of power for months was between those who advocated a stimulus to aide economic growth and drag the economy out of stagflation, and those who believe inflation to be the bigger threat, a threat made worse by any increase in government spending. 

What emerged was a stimulus package, which included the much discussed windfall tax on energy company profits. The government claim the package to be worth around £15bn, and would aide the fight against the cost of living crisis. 

But will it be enough to stave of the recession the BoE expects in the UK later this year?

The parlous state of the economy is exemplified by the fact GDP contracted in March. 

Not all of the recommendations of the four economists mentioned above were the same, and not all were taken up by the chancellor.  

Sunak’s surprise 

Lyons says the £15bn package will not be enough as he feels more action is needed now as interest rates are being raised too late and demand in the economy is falling. 

He says the windfall tax on energy companies was an error, and says a recession is “likely” this year. 

Lyons adds: “There is a current debate as to how to describe this, as economic forecasts tend not to suggest there will be two successive quarters of negative growth – the technical definition of recession – nor that the UK’s annual rate of growth will dip below zero.

"However, in our view, two negative quarters of economic growth looks inevitable and a deeper downturn is possible. TheGFK measure of consumer confidence has fallen to minus 38. It was only once weaker at minus 39 during the financial crisis. A year ago it was minus 15.

"The deterioration in people’s view of their own finances over the next 12 months is worrying, from a net positive balance of 10 a year ago to a net negative 26 now.”

By contrast, Rupert Thompson, investment strategist at Kingswood, says the stimulus equates to around 0.6 per cent of GDP, and says that may be enough to stave off the recession the BoE expects to happen this year, as any forecasts for negative economic growth were for a relatively minor decline this year. 

Savings glut 

Lyons' data points around the levels of consumer confidence are particularly salient in light of the savings glut that may exist in the UK and global economy.