Will we see a recession in 2022?
Eyebrows were raised towards the end of April, when Deutsche Bank became the first major financial institution to predict a recession in the United States.
That’s largely thanks to the Federal Reserve’s attempts to tackle a 41-year high inflation rate of 8.4% and the time it took to bring it down to its 2% target.
The UK is of course facing a similar challenge, with inflation on these shores peaking at 9% in April, its highest level in 40 years, and the government also struggling to meet its own fixed target of 2%.
So, is the UK also headed for a recession this year? We will discuss this in more detail in the article below.
What is a recession?
While some people use the word “recession” to describe the contraction of an economy, its actual definition is actually much more precise.
More specifically, a recession is characterized by two consecutive quarterly declines in its gross domestic product (GDP). Similarly, a recession will be declared if a national economy experiences negative GDP growth during this period, which covers six months in total.
When the GDP rate of a country decreases for a month or a quarter, it is called an economic contraction. A nation’s wealth is ultimately calculated by its GDP, but there are other measures that can indicate an impending recession.
For example, further declines in real income, employment rates, and wholesale retail sales may also characterize a recession. Declines in industrial production and manufacturing could also precipitate a recession, so such events are usually preceded by a number of different events.
Is the UK headed for a recession this year?
According to a British think tank (the National Institute for Economic and Social Research), the UK is on the verge of entering recession in the second half of 2022.
The global data certainly seems to suggest that might be the case. For example, the Office for National Statistics (ONS) revealed that GDP fell by 0.1% on a monthly basis after initially stagnating in February.
Currently, UK GDP is estimated at just 0.7%, and further depreciation by the end of June will leave the region on the brink of economic recession.
As we have already discussed, the cost of living crisis and runaway inflation are at the heart of this problem, with the cost of energy being particularly problematic for British households.
Specifically, the energy price cap increased by 12% in October 2021 and 54% in April, the latter equating to a £700 hike in bills for the average household. A further rise is expected for October, compounded by rising fuel and food costs.
This is already putting pressure on consumer confidence and spending, as retail sales plunge and companies start to see profits fall in line with demand.
It is this that creates a cycle of negative and inadequate GDP growth over a much longer period, as reduced corporate income can translate into stagnant wage growth and higher unemployment rates if sustained. indefinitely.
To make matters worse, the Bank of England (BoE) in the UK has followed in the footsteps of the Federal Reserve in the US by raising its base interest rate to combat rising inflation.
After being capped at 0.1% during the coronavirus pandemic, the BoE has initiated four base rate hikes in the previous five months since December 2021. The most recent of these came in early May, the rate of basis having fallen from 0.75% to 1% and reached its highest level for 13 years.
While this may ultimately succeed in curbing inflation, this process is likely to take a long time and may not be fast enough to prevent the UK from sliding into a recession.
In fact, the rising cost of borrowing for businesses and households could further tighten financial pressure in the near term, arguably making a recession more likely at some point in 2022.
The Bottom Line – What’s Next?
Although there is no surefire way to predict that the UK will enter a recession, recent research and the country’s GDP performance suggest that this outcome is very likely at some point in 2022.
The rising cost of living and associated quantitative easing measures are also weighing on the economy in real time, affecting both households and businesses nationwide.
If the UK Is entering a recession, the impact of the rising cost of living will be felt even more, as consumer spending falls even more dramatically and corporate earnings continue to depreciate.
This could lead to job losses and more widespread wage freezes, the latter particularly troubling given that people’s wages are already not enough to cover the cost of basic necessities like fuel and food in some cases. .
Ultimately, we’ll have to wait and see if the UK slips into its first major recession since 2008. However, it is important that households, businesses and investors prepare for this eventuality and take steps to protect against the worst of the fallout.