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These times are worrying for Claire Tasker’s jewelry business. With the rising cost of living putting acute pressure on households across the country, the Hertfordshire-based goldsmith has seen firsthand how consumers are saving.
“If people don’t have money to spend, then they don’t really think about buying items like mine,” says the small business owner, who sells her handmade jewelry from her home workshop in Hitchin.
Not only sales are under pressure. The cost of the gold, silver, copper and precious stones used to manufacture their wares has also increased dramatically.
“I can’t imagine it getting any better,” says Tasker. “The cost of living is also a problem for me. There’s the stress of making money and the unnerving of being self-employed. They have no fixed income.”
What Tasker sees in Hitchin is a microcosm of the broader economy. Inflation has been rising since last summer and there were already signs that the post-Covid recovery was faltering even before Vladimir Putin ordered his troops to Ukraine. The economy grew just 0.1% in February and retail sales fell more-than-expected in March.
In April, pressure on the cost of living increased. The average energy bill has increased by £700 a year; Rishi Sunak has increased taxes; Car costs have gone up. The greatest squeeze on living standards since the 1950s has left consumers more gloomy and far less willing to spend in stores.
For experts, the question isn’t whether the economy is slowing down, but whether it’s time to call the R-word recession. David Blanchflower, a former member of the Bank of England‘s Monetary Policy Committee, has no doubts. “All the evidence points to a recession coming,” he says.
The prospect of the UK suffering two consecutive quarters of negative economic output – the technical definition of a recession – was certainly not considered likely by the Office for Budget Responsibility (OBR) when it prepared forecasts for the Chancellor’s spring statement. While noting the headwinds consumers are facing, the OBR said growth would be 3.8% this year. The International Monetary Fund’s latest World Economic Outlook forecast growth of 3.7% – the shared strongest in the G7 group of developed nations.
The OBR and IMF forecast a significant slowdown in 2023, but the bad economic news has arrived sooner than expected. Even economists less gloomy than Blanchflower accept that the risks of a recession have increased in recent months. According to Deutsche Bank, the chances of an economic downturn are now almost one in three. With inflation likely to remain elevated for much longer, pressure on households to retreat will increase over the summer. It will feel like a recession for many consumers, even if the official data says otherwise.
If the economy does slide into recession, the Treasury and the Bank of England will be blamed for policy mistakes. A Treasury spokesman said: “We now continue to support the economy. We are providing a £22bn package this year to ease the pressure on households and help businesses, including through a tax cut worth up to £1,000 for half a million small businesses.”
Rachel Reeves, the shadow chancellor, says Sunak made a mistake by not doing more to protect consumers from the coming economic storm in his spring statement.
“The UK economy has already been tested by the Chancellor’s failure to stimulate business and put in place a real growth plan. Now we face another year of declining living standards and stunted growth,” she said.
Labor is urging the government to put in place an emergency budget to avert growing economic risks. With local elections this week, the rising cost of living could mean a heavy price for the Conservatives. Reeves said comments from Sunak that it was “stupid” to expect more support showed the party had lost touch.
“We are the only major economy raising taxes on people in the midst of a cost-of-living crisis, and it’s a decision that will significantly worsen conditions for families already feeling the effects of the crisis.”
The Treasury Department dismisses accusations of sleeping at the wheel, noting that investment will be boosted this year by the super withholding tax break and that the spring declaration included tax breaks and a reduction in excise duty for motorists. Despite this, Sunak’s popularity has waned as the cost-of-living crisis has deepened.
Consumer spending could be shored up by more than £200bn in savings built up by households during the pandemic. However, the glut of savings was mostly concentrated in the richest 40% of society, while lower-income households lost money. While average wages are unlikely to keep pace with inflation, the public sector and precarious zero-hour jobs are likely to lose the most ground this year.
The Bank of England’s Monetary Policy Committee is expected to react to a 7% annual inflation rate – the highest in 30 years – by raising interest rates for the fourth consecutive week this week. The city expects a quarter-point rise to 1% on Thursday — the highest level since immediately after the 2008 financial crisis.
The bank wants to prevent persistently high inflation from gaining a foothold, but economists warn of the risk that rising borrowing costs will exacerbate the problems faced by businesses and households when the economy is already faltering. Of the five tightening cycles in the UK since the late 1970s, four have ended in recession.
“By focusing on containing second-round effects on wages and prices, the bank risks pushing the economy into recession,” said Paul Dales, UK chief economist at consultancy Capital Economics. Though he expects Threadneedle Street to hike interest rates as high as 3% by 2023, a severe downturn could force the company to slow down.
“A slight recession and/or a slight fall in property prices should not deter the bank too much if pricing pressures remain strong. But if the economy and/or housing market is weaker than we expect, the bank may not hike rates as much,” he said.
Stephen King, a senior economic adviser at HSBC, said central banks had been caught off guard by rising inflation and there was still a belief they would return to target with only modest rate hikes.
“History shows that once you have an inflation problem, you have to go through a lot of economic pain to get rid of it,” King added.
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For Tasker, Brexit complicates the situation, with higher shipping costs and delays making it difficult to sell to EU customers. During the corona pandemic, it benefited from booming domestic demand, which, however, is drying up.
“Since the news that there will be energy price increases, I’ve seen a drop in sales. It’s not just me, I’m on all the Facebook groups with people who have small businesses,” she said.
“If people don’t spend, companies will close. I’m not sure if that’s going to help the economy at all.”
Worries about the global economy have also mounted this week, with data showing euro-zone manufacturing output growth stalled in April, while factory activity in China fell more sharply as the Covid-19 lockdown hit industrial production and disrupted the supply chains.
How are other major economies faring?
US
The world’s largest economy contracted unexpectedly in the first quarter. GDP contracted by 0.4%, on the back of a weaker contribution from trade and lower government spending as Covid relief measures ended. Inflation has hit 8.5%, the highest in four decades, putting pressure on the Federal Reserve to raise interest rates.
euro zone
Growth slowed to 0.2% in January-March from 0.3% in the fourth quarter of 2021. Germany recovered from a contraction in the final months of last year, but the French economy faltered, Italy shrank and Spain’s growth slowed. Experts warn that the region faces an increased risk of inflation due to dependence on gas imports and an economic slowdown from tensions with Russia amid the war in Ukraine.
China
The world’s second-biggest economy is under pressure as Beijing’s zero-Covid policy has led to lockdowns on major cities to curb the spread of omicron, weighing on factory production and consumer spending. The impact is expected to impact global supply chains and hit activities in other countries. GDP grew by 1.3% in the first quarter.
Russia
Russia is expected to fall into a deep recession this year and next as sweeping Western sanctions imposed after Vladimir Putin’s invasion of Ukraine will impact economic activity. GDP is forecast to fall by 8% to 10% in 2022, the largest annual decline since the collapse of the Soviet Union in the 1990s. Inflation is expected to reach up to 23%.
