UK recession still on cards, warns Bailey

Bank of England Governor says ‘long but shallow’ downturn is on cards – but inflation will fall rapidly

The Governor of the Bank of England has declared that Britain has “turned a corner” in its fight against inflation but warned that a recession is still on the cards this year. Andrew Bailey said the UK was braced for “long, but shallow” downturn in contrast to eurozone economies which claim that they will likely avoid falling into recession. He added that a mild winter had helped to keep a lid on energy prices and predicted the cost of living squeeze would ease in the coming months.

THE Governor of the Bank of England has declared that Britain has “turned a corner” in its fight against inflation but warned that a recession is still on the cards this year.

Andrew Bailey said the UK was braced for “long, but shallow” downturn in contrast to eurozone economies which this week signalled that they will likely avoid falling into recession.

Speaking to the Western Mail on a visit to Wales, Mr Bailey said: “I am afraid – and I know we have been marked down as a pessimist by saying, as we did in November – we think there will be a recession.”

However, he added that a warmer than expected winter has helped to keep a lid on energy prices and predicted that the cost of living squeeze would ease in the coming months.

He said falling energy prices have not yet fed through to consumers but will do so soon, adding: “That is encouraging and I think it is a product that Europe has higher stock levels and we had a warmer winter than we might have done. It does mean there is more optimism now that we are sort of going to get through the next year with an easier path there.”

His comments came after Christine Lagarde, president of the European Central Bank, and Olaf Scholz, the German chancellor, noted that the outlook for the eurozone had improved markedly in the past few weeks.

Ms Lagarde said a “small contraction” is now more likely than a recession, adding: “It’s not a brilliant year but it’s a lot better than we have feared.”

Earlier this week, Mr Scholz said Germany will avoid a recession owing to new liquefied natural gas (LNG) terminals on the Baltic and North Sea coasts helping to cushion the blow from the energy crisis on the country’s crucial manufacturing sector.

UK energy bills are forecast to drop by up to £600 more than previously expected this summer as a result of falling wholesale prices, in a boost for households and the Government. Analysts at Cornwall Insight said they now expect the annual price cap to fall to £3,208 in April and then £2,200 between July and December. That compares with their previous predictions at the start of January of £3,545 for April and £2,800 to £2,835 between July and September.

The actual level of the price cap will depend on wholesale prices over coming months. They have been falling due to milder weather. If it falls as predicted, it would mean the Government would not be paying anything to subsidise households after July. However, households will still be facing bills far higher than historic averages.

Mr Bailey said it is “the beginning of a sign that a corner has been turned” for the UK on inflation.

He added: “What we think is the most likely outcome is that it [inflation] will fall quite rapidly this year, probably starting in the late spring, and that has a lot to do with energy pricing.”

Bosses at the World Economic Forum in Davos this week struck a more optimistic tone on the prospects for the UK.

Peter Herweck, chief executive of industrial software giant Aveva, said companies were looking for opportunities to invest. He said: “We need to be careful that we’re not talking ourselves into a recession. Of course there is an energy crisis, but we had energy crises before. We’re lucky that the winter is not as strong as we thought it would be. But always in a crisis there is opportunity and it’s our obligation as businesses to talk about the opportunities and not talk ourselves into depression.”

However, there are signs the economy is still struggling with consumer confidence falling back to near all-time lows amid spiralling food prices.

Gfk’s Consumer Confidence Index dropped three points in January to minus 45, having hit a record low of minus 49 in September.

While overall inflation dipped to 10.5pc in December, food price inflation is at a 45-year high of 16.8pc. Joe Staton, client strategy director at GFK, said: “One thing we can be sure of is that 2023 promises to be a bumpy ride.”

‘I know we have been marked down as pessimists, but we think there will be a recession’