British economy stagnant at year-end
Worse to come, say forecasters as slump compounded by strikes, tax hikes
LONDON — Price pressures in the United Kingdom are likely to worsen as Britain faces historic work stoppages amid a prolonged economic slowdown, compounded by tax increases and higher interest rates that policymakers have unleashed as they battle doubledigit inflation.
That gloomy outlook was underscored Friday when the U.K. Office for National Statistics said the economy stagnated in the final three months of 2022. Monthly estimates suggest that economic activity slowed further at the end of the year, with gross domestic product shrinking 0.5% in December.
While Britain avoided a second consecutive quarter of declining economic output — the definition of a technical recession — the data offered little relief for hard-pressed families and businesses. The rising cost of living has driven months of strikes by nurses, ambulance workers, train drivers and other public-sector employees seeking higher pay.
Middle-class families will see their disposable incomes fall by as much as 13%, or $4,840, over the next financial year, according to analysis by the National Institute for Economic and Social Research. About 25% of households won’t be able to pay their food and energy bills out of their take-home income, up from 20% last year, the independent think tank estimates.
“The U.K. will likely avoid a protracted recession in 2023, but GDP growth is set to remain close to zero,” the institute said. “However, with the cost-of-living crisis having a lasting effect on households, for at least 7 million it will certainly feel like a recession.”
For people across the U.K., that means turning down the heat and skipping showers to save money on gas and electricity bills after energy prices soared after Russia’s invasion of Ukraine. It also means constantly hunting for bargains or resorting to food banks after food prices jumped 16.9% last year.
The U.K. government says its policies, including a cap on gas and electricity prices that is designed to limit average household energy bills to $3,027 a year, have reduced the severity of Britain’s economic downturn.
While a formal recession is often defined as an extended period of economic decline, experts disagree on exactly how to determine when a recession begins.
The United States and European Union have independent bodies that look at a wide range of indicators, including unemployment, consumer and business spending, before deciding whether their economies are in recession. Britain does not.
That left analysts anxiously awaiting the fourth-quarter report to see whether Britain had met the technical definition of a recession. The U.K. economy shrank by 0.2% in the third quarter.
On Friday, Treasury chief Jeremy Hunt focused on GDP expanding 4% throughout 2022, more than any other advanced economy of the Group of Seven. But the growth occurred in the early part of 2022, before inflation spiked.
“The fact that the U.K. was the fastest-growing economy in the G-7 last year, as well as avoiding a recession, shows our economy is more resilient than many people feared,” he said. “However, we are not out the woods yet, particularly when it comes to inflation.”
Regardless of the technicalities, the global economic slowdown is hitting Britain harder than other major economies.
Inflation in the U.K. remains at levels last seen in the early 1980s. Consumer prices rose 10.5% in December from a year earlier after peaking at 11.1% in October. By contrast, U.S. consumer inflation slowed to 6.5% in December.
Britain also is facing a drop in trade with the EU as a result of departing from the bloc and increasing taxes for consumers and businesses as the government tries to balance its budget and reduce debt.
More troubling for economic forecasters is an increase in the number of people aged 50 to 65 who are leaving the workforce prematurely, reducing productivity.
All of that is reducing consumer spending and business investment.
Britain’s economy will likely shrink 0.6% this year, the only advanced nation expected to decline, the International Monetary Fund said last month.
The Bank of England expects the slowdown to last throughout 2024, even though officials say the recession will be shallower than previously forecast. The central bank has raised interest rates 10 times since December 2021 in an effort to slow inflation.