UK economy looking at a long winter Recession?

Hi everyone, this week I will be analysing the state of the UK economy and how it may be heading towards a recession. I will also analyse the steps and policies it could implement in order to navigate through this crisis.

The UK economy has contracted by 0.2% in the third quarter of 2022, signalling that the country may be heading towards a long economic recession. A storm of high energy and food prices has hit the economy, which is widely seen as a major cause of the expected recession. The Bank of England has forecast that the nation may witness a recession by next year, maybe one of the longest since the 1920s. With the production in the economy already stalling, unemployment is expected to almost double. However, countries all across the globe haven't been performing well, UK has been recorded as the worst-performing economy compared to other major economies. The UK recently lost its status of being the world's fifth-largest economy as the Indian economy outperformed the nation. Inflation in the UK economy currently stands at over 10%, high above the tolerance limit of the central bank. The Bank of England recently raised interest rates to 3% up from 2.25% last month, the biggest hike since 1989 as it warned of a long recession.

The current state of the economy:

The UK economy currently seems to be going through a rough path. Firstly, the cost of living crisis that started after the supply chain disruption due to post-pandemic demand after the end of COVID lockdowns. Russia's war in Ukraine has pushed energy and food prices up all across the globe, therefore worsening the already brewing cost of living crisis.

The UK economy has shrunk by 0.2% in the third quarter of 2022, and the unemployment figures have also been gloomy, the unemployment rate in the UK currently stands at 3.5%. The inflation seems to be touching the sky with the inflation rate at a 4-decade high of 10.1%. As winter approaches, the outlook for the economy seems to be grim.

Nation's response to the Crisis:

The Bank of England has responded to the brewing crisis, by raising interest rates to 3%, while signalling more hikes are to come until the inflation is under control. At the same time, the Chancellor has laid unveiled a major 55 billion pound fiscal plan to pull the country out of the current situation and avoid a long winter recession. The Chancellor highlighted that 30 billion pounds have been allocated to spending cuts and 25 billion pounds to tax hikes. This will ensure that both the monetary as well as fiscal policy work in the same direction, being contractionary, unlike the tax cut plan unveiled by the previous Prime Minister. The sole aim of the plan remains to bring down inflation, which as outlined by the government will lead to more financial hardships for Britons who are already dealing with a cost of living crisis for the past few months. However, the plan will help raise public finances which the Government may use to finance benefits in the long run.

The government also announced measures of increasing tax credits and state pensions by 10% to help people cope with the rising inflation. One of the biggest announcements was the increase in the windfall tax on the energy industry to 35% up from 25%. The industry has been enjoying huge profits for many months now even when the public sufferers under the burden of high inflation.

Analysis:

As 'winter' approaches the UK finds itself in a recession and the future economic outlook is also very grim which predicts this recession to be one of the longest since the 1920s. The UK is looking at a situation of stagflation being built up as it first experienced the energy price shock due to post-pandemic demand and the Russia-Ukraine war, along with slow economic growth.

The Government's response to the crisis has been swift. However, the tax increases by the administration are only expected to result in a much worse situation for the economy as the cost of living crisis is expected to drag on. During winter, the demand for heating appliances is expected to rise to lead to higher prices, along with higher windfall taxes. This will lead to a whopping rise in energy bills for Britons. However, the government has announced tax credits, which may offer some respite to people. Yet, the economic outlook remains dire for the UK economy. The question remains whether the UK will be able to bring its economy back from the brink of a long winter recession.

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References:

https://www.bbc.com/news/uk-63582201. (n.d.).

Smith, E. (2022, November 11). UK on the brink of recession after economy contracts by 0.2% in the third quarter. CNBC. Retrieved November 18, 2022, from https://www.cnbc.com/2022/11/11/uk-on-the-brink-of-recession-after-economy-contracts-by-0point2percent-in-the-third-quarter.html

Guardian News and Media. (2022, November 2). The UK economy is about to be thrown into a black hole – by its own government | Larry Elliott. The Guardian. Retrieved November 18, 2022, from https://www.theguardian.com/commentisfree/2022/nov/02/the-uk-economy-is-about-to-be-thrown-into-a-black-hole-by-its-own-government

Ferguson, E. (2020, March 26). Coronavirus: UK economy 'hurtling towards recession'. Express.co.uk. Retrieved November 18, 2022, from https://www.express.co.uk/finance/city/1260737/UK-recession-news-economy-coronavirus-gdp-services-2008-financial-crash

Gilchrist, K. (2022, November 17). UK finance minister announces tax hikes and spending cuts, says country is in recession. CNBC. Retrieved November 18, 2022, from https://www.cnbc.com/2022/11/17/uk-finance-minister-announces-tax-hikes-and-spending-cuts-says-country-is-in-recession.html