Britain to enter recession this year, think tank forecasts

Britain is on course to enter a technical recession in the second half of 2022, with rising prices expected to affect living standards, an economic think tank said on Wednesday.

The National Institute of Economic and Social Research (NIESR) forecast the UK's gross domestic product will fall by 0.2 per cent in the third quarter and 0.4 per cent in the last three months of the year.

That would mark two consecutive quarters of contraction, a commonly used definition of recession.

“Times are difficult for the UK economy,” said Niesr's deputy director for macroeconomics, Stephen Millard, a former Bank of England economist.

NIESR said the downturn would not count as a recession on its preferred definition — similar to that used by the US National Bureau of Economic Research — which requires a more sustained contraction.

Last week, the Bank of England forecast Britain's economy would shrink by up to 1 per cent in the final quarter of this year and also contract over 2023 as a whole — but not that it would shrink for two consecutive quarters.

The think tank estimated that Russia's invasion of Ukraine will knock 1.1 per cent, or $1.5 trillion, off world economic output this year — roughly the equivalent of an economy the size of Australia's.

It also cut its UK growth forecast for 2022 to 3.5 per cent from 4.8 per cent and downgraded its 2023 forecast to 0.8 per cent from 1.3 per cent, though this is stronger than the UK central bank's outlook, which forecast a 0.25 per cent contraction in 2023.

Consumer price inflation was likely to peak at 8.3 per cent, lower than the bank's forecast of more than 10 per cent, as NIESR does not expect energy prices to rise as much as the bank does.

It also predicted a bigger dampener on inflation from falling output and rising unemployment.

But the government should raise its main welfare benefit for the unemployed and low-paid — Universal Credit — by £25 ($31) a week to help offset surging bills and give a £250 ($308) grant to the poorest 40 per cent of households, it said.

Finance minister Rishi Sunak scrapped a temporary £20 ($31) Covid-related increase to universal credit in October. Niesr's proposals would cost £4.2 billion ($5.2bn), compared with the £20bn ($25bn) of headroom Mr Sunak has relative to his self-imposed fiscal rules.

Mr Sunak said two weeks ago it would be “silly” to offer more support now and he wants to wait until later in the year when the economic outlook will be clearer.

But Prime Minister Boris Johnson told Parliament on Tuesday that the government would have more to say in the coming days on cost of living support.

NIESR estimated about 1.5 million British households — about 5 per cent of the total — would soon face bills for food and energy that exceed their disposable income after housing costs.

“The impact on those households could easily be reduced with no deterioration in the medium-term sustainability of our fiscal position,” NIESR director Jagjit Chadha said.