UK heads into ‘deepening economic crisis’ as recession looms

From 1h ago

Introduction: UK faces ‘deepening economic crisis’ as recession looms

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The UK is heading into deepening economic misery, after a horror show of economic forecasts from the Bank of England yesterday.

Britain faces a bleak outlook — heading into a recession this winter that will last over a year, with inflation surging over 13%. Unemployment will rise and households will face a historical squeeze on living standards following the sharp jump in gas prices, the BoE said.

The economic costs of Vladimir Putin’s invasion of Ukraine have mounted, on top of an economy already hurt by the pandemic, and adjusting to the reality of Brexit.

The Bank’s grim warning came alongside the biggest rise in interest rates by the most in 27 years on Thursday, as its policymakers desperately try to get a grip on inflation (currently 9.4% and heading higher).

Jack Leslie and James Smith of Resolution Foundation have analysed the Bank’s monetary policy report, and say its forecasts are ‘disastrous’ for living standards.

They warn:

Despite the Government spending over £30bn in support, the Bank is forecasting that the economy will fall into recession later this year, contract for six successive quarters and not recover its pre-pandemic level within the forecast period (ending mid-2025). Inflation is now projected to peak higher – at an eye-watering 13.3% in October – and high inflation will now be with us for longer.

All this is disastrous for living standards: the Bank now expects that real household disposable income will fall by around 3.7% over the course of 2022 and 2023 – the largest such fall on record.

To pile misery onto families, the Bank forecasts that unemployment will rise by roughly 900,000 people; the Bank sees this as sufficient to keep inflation from becoming entrenched.

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What do today's @bankofengland announcements mean for households? Average real post-tax household incomes are expected to fall by around £2,000 across this year and next. The Government will inevitably need to do more to shield families from the worst effects of this crisis. pic.twitter.com/NN1AxQ5152

— Resolution Foundation (@resfoundation) August 4, 2022

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What do today’s @bankofengland announcements mean for households? Average real post-tax household incomes are expected to fall by around £2,000 across this year and next. The Government will inevitably need to do more to shield families from the worst effects of this crisis. pic.twitter.com/NN1AxQ5152

— Resolution Foundation (@resfoundation) August 4, 2022

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But the big news is the Bank’s grim outlook for this winter, with inflation forecast to peak at 13.3 per cent in October – higher the previously thought. In addition, this high inflation is also expected to last longer, reflecting higher gas prices. pic.twitter.com/mQeQmQ2NCv

— Resolution Foundation (@resfoundation) August 4, 2022

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But the big news is the Bank’s grim outlook for this winter, with inflation forecast to peak at 13.3 per cent in October – higher the previously thought. In addition, this high inflation is also expected to last longer, reflecting higher gas prices. pic.twitter.com/mQeQmQ2NCv

— Resolution Foundation (@resfoundation) August 4, 2022

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A weaker economy is projected to lead to a rise in the unemployment rate from its current level of 3.8 per cent to above 6 per cent. This, combined with higher and long-lasting inflation, means that real household disposable income could fall by 3.7 per cent across 2022 and 2023. pic.twitter.com/hmvD99wtJT

— Resolution Foundation (@resfoundation) August 4, 2022

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A weaker economy is projected to lead to a rise in the unemployment rate from its current level of 3.8 per cent to above 6 per cent. This, combined with higher and long-lasting inflation, means that real household disposable income could fall by 3.7 per cent across 2022 and 2023. pic.twitter.com/hmvD99wtJT

— Resolution Foundation (@resfoundation) August 4, 2022

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Rising energy prices will lead families and businesses to cut back spending on other items, with higher prices overall meaning spending will not go as far. This leads to a significantly weaker outlook for the economy – hence the Bank expecting a recession in Q4 this year. pic.twitter.com/5DfOS77jKN

— Resolution Foundation (@resfoundation) August 4, 2022

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Rising energy prices will lead families and businesses to cut back spending on other items, with higher prices overall meaning spending will not go as far. This leads to a significantly weaker outlook for the economy – hence the Bank expecting a recession in Q4 this year. pic.twitter.com/5DfOS77jKN

— Resolution Foundation (@resfoundation) August 4, 2022

Leslie and Smith says there is no quick fix to rising energy costs. So the next prime minister must do more to shield families from the worst effects of the crisis, focused on low-to-middle income households.

All this lays bare the challenges for the next Prime Minister: although they might hanker after a honeymoon period, the reality is that the deepening economic crisis will be top of their ‘to-do’ list – and in particular providing support focussed on low-to-middle-income households – when they step into 10 Downing Street on 5 September.

Also coming up today

The latest US jobs report is due later, showing the health of America’s employment market as its economy slows. Economists predict job creation slowed in July, to 250,000 from 372,000 in June.

The agenda

7am BST: Halifax house price index for July
1.30pm BST: US jobs report for July

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Andrew Bailey has denied that the Bank acted too late to tackle the UK’s inflationary threat, following criticism from allies of Liz Truss.

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No-one knew a year, two years ago, that there would be a war in Ukraine, he tells the Today Programme.

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Q: But inflation hit 30-year highs in December, before the Ukraine invasion.

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Bailey points out that the Bank has been raising interest rates since December, and before that point the economy was still recovering from the pandemic.

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If the Bank had acted faster, it would have risked bringing forward a recession – if the furlough scheme had led to an increase in unemployment

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Q: Attorney General Suella Braverman says rates should have been raised a long time ago – you’re saying very plainly that is wrong?

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I am saying that, Bailey replies:

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“If you go back two years, which is, given the monetary transmission mechanisms, where we’d have to go back to, given the situation we were facing at that point in the context of Covid, in the context of the labour market, the idea that at that point we would have tightened monetary policy, you know I don’t remember there were many people saying that.”

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Bailey adds that he looks forward to an ‘active engagement’ with the new government, and the Bank is always there to support taking public policy forward.

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The Today Programme are playing their interview with Bank of England governor Andrew Bailey now.

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Asked about the political storm around the BoE’s handling of the crisis, Bailey says central bank independence is ‘critically important’, but its job is to get inflation back to target.

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Bailey insists he intends to serve his full eight-year term as governor.

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Q: Would changes to your current terms of independence be damaging, or are you open to change?

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Bailey replies that he doesn’t see a large desire to question central bank independence, but he’s very happy to discuss the details of the current regime.

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He rejects claims that the Bank is not accountable – it’s accountable to parliament, and he testifies to MPs regularly.

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Bailey also points out that the government sets the Bank’s target for price stability (currently 2% inflation).

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I’m open to any discussions with the government about how they think the regime should operate, Bailey adds.

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UK house prices fell for the first time in more than a year in July, as the country’s largest lender warned of the impact of higher interest rates and the broader cost of living crisis.

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The average price of a home was £293,221 last month, down 0.1% month on month, the first decrease since June last year, according to the latest report from Halifax.

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The marginal drop pushed down the annual rate of growth from 12.5% to 11.8%, although overall house prices remain more than £30,000 higher than at the same time last year.

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Instant Info – Halifax UK House Price Index pic.twitter.com/gaVCQwnG3r

— BuiltPlace (@BuiltPlace) August 5, 2022

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Russell Galley, Halifax’s managing director, says households are being squeezed by rising borrowing costs:

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“While we shouldn’t read too much into any single month, especially as the fall is only fractional, a slowdown in annual house price growth has been expected for some time.

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“Leading indicators of the housing market have recently shown a softening of activity, while rising borrowing costs are adding to the squeeze on household budgets.”

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Here’s the full story:

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Here’s some reaction:

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House prices inched down 0.1% in July, says @HalifaxBank. "A slowing of annual house price inflation still seems the most likely scenario,” it says. But prices climbed 11.8% over the year, a rise of more than £30,000. That's still a rise of £82 a day pic.twitter.com/bz4g24jKS8

— simon read (@simonnread) August 5, 2022

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AVG UK house prices fell 0.1% in July. Is this the beginning of a gradual descent or a summer respite? A typical UK property now costs £293,221 down £365 on last month. Those who do want to sell, maybe more motivated to do so with this first cold snap @HalifaxBank HPI pic.twitter.com/Km5FQR1zYC

— Emma Fildes (@emmafildes) August 5, 2022

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Britain’s next prime minister must find billions of pounds of support for households and public services, Paul Johnson, director of the Institute for Fiscal Studies think tank, has said.

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Speaking to BBC Radio 4’s Today programme about the Bank of England’s forecasts, Johnson warned that the Conservative leadership debate is not focusing on the challenges facing the public finances.

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Johnson said high inflation could give a short-term lift to tax revenues (from higher wages and prices)….

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But the thing that I find remarkable about the Conservative leadership debate is that they don’t seem to be talking about the things that’s really going to be in need of public finances.

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“The first is, of course, they’re going to have to find many more billions to support households. I mean, this is a much bigger increase in energy bills than was expected even a few months ago when the support packages were announced, and that’s not going to be helped by the sorts of tax cuts that are being talked about.

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Johnson also warns that some struggling public services face “potentially big real-terms cuts”

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“Secondly, of course, there’s going to need to be more money for public services – the health service education and so on – because with inflation at 13%, and pay rises there in the 5-6% range, that means that the level of increases that were put in place this year and announced a year ago are looking far too small, because that was done in the expectation that inflation will be 3-4%.

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Labour MP Barry Sheerman tweets:

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Paul Johnson more sane & sensible than any available cabinet minister @BBCr4today

— Barry Sheerman MP (@BarrySheerman) August 5, 2022

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Today’s UK newspapers are dominated by the Bank of England’s prediction that the UK is heading into a long recession:

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The Financial Times goes big with a “red alert” graphic showing GDP and inflation alongside an image of Bank governor Andrew Bailey, under the headline:

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“BoE warns of long recession as interest rates rise by half-point”. It notes that the outlook is worse than that of the US or the EU.

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Just published: front page of the Financial Times, UK edition, Friday 5 August https://t.co/ZrPdyJmTCG pic.twitter.com/kzCgmoIBOB

— Financial Times (@FinancialTimes) August 4, 2022

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“Britain slides into crisis”, says the Times, creating a similar graphic showing interest rate rises, under the title “black Thursday”.

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Economics editor Mehreen Khan says the Bank “unleashed a catastrophic set of forecasts that would have been scarcely believable a year ago”.

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Friday’s TIMES: “Britain slides into crisis” #TomorrowsPapersToday pic.twitter.com/abR13Hm9al

— Allie Hodgkins-Brown (@AllieHBNews) August 4, 2022

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Today’s Guardian leads on the Bank’s latest rate rise and the forecast of 13% inflation. It lays the blame squarely on Vladimir Putin over his invasion of Ukraine, quoting Bailey’s line that “there is an economic cost to the war”.

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Guardian front page, Friday 5 August 2022: Bank raises rates and warns of 13% inflation. Plus special report on global heating: The burning issue pic.twitter.com/lQceGMMxMR

— The Guardian (@guardian) August 4, 2022

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The Daily Mail calls Andrew Bailey “The banker who is running out of credit”, saying the Bank faced a ferocious backlash last night for not acting sooner.

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Friday's @DailyMailUK #MailFrontPages pic.twitter.com/IllsuhpePh

— Daily Mail U.K. (@DailyMailUK) August 4, 2022

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My colleague Graham Russell has all the details here:

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The two candidates to become the next prime minister clashed over the solution to the crisis last night.

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Liz Truss claimed a recession wasn’t inevitable, and that cutting taxes would help the economy grow. She’s promising an emergency budget if she succeeds Boris Johnson.

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But Rishi Sunak, who appeared after Truss for a grilling from Conservative members on Sky News, stepped up his criticisms of Truss’s £30bn plan for unfunded tax cuts, claiming it would lead to “misery for millions”.

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Sunal warned:

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“The lights on the economy are flashing red, and the root cause is inflation. I’m worried that Liz Truss’s plans will make the situation worse.

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“If we just put fuel on the fire of this inflation spiral, all of us, all of you, are going to just end up with higher mortgage rates, savings and pensions that are eaten away, and misery for millions.”

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Here’s the full story, by my colleague Heather Stewart:

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Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

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The UK is heading into deepening economic misery, after a horror show of economic forecasts from the Bank of England yesterday.

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","elementId":"0c3768ef-d8ac-4d72-8227-6048f6ab68c7"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

The economic costs of Vladimir Putin’s invasion of Ukraine have mounted, on top of an economy already hurt by the pandemic, and adjusting to the reality of Brexit.

","elementId":"ad60c6b2-2e61-4210-954e-9ea6a311c45d"},{"_type":"model.dotcomrendering.pageElements.RichLinkBlockElement","url":"https://www.theguardian.com/business/2022/jul/08/boris-johnson-has-left-the-uk-economy-in-a-parlous-state","text":"Boris Johnson has left the UK economy in a parlous state","prefix":"Related: ","role":"inline","elementId":"6248f8b8-d44e-4973-ad72-94e2b1a9c1fe"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

","elementId":"1b8a6b55-643b-4786-952d-b95f017ea06d"},{"_type":"model.dotcomrendering.pageElements.RichLinkBlockElement","url":"https://www.theguardian.com/business/2022/aug/04/bank-of-england-raises-interest-rates-to-1-point-75-per-cent-in-biggest-hike-in-27-years","text":" Bank of England hikes interest rates and says inflation will hit 13%","prefix":"Related: ","role":"inline","elementId":"3d341849-10ab-4c34-a3cc-dd5474a2a792"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Jack Leslie and James Smith of Resolution Foundation have analysed the Bank’s monetary policy report, and say its forecasts are ‘disastrous’ for living standards.

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They warn:

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Despite the Government spending over £30bn in support, the Bank is forecasting that the economy will fall into recession later this year, contract for six successive quarters and not recover its pre-pandemic level within the forecast period (ending mid-2025). Inflation is now projected to peak higher – at an eye-watering 13.3% in October – and high inflation will now be with us for longer.

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All this is disastrous for living standards: the Bank now expects that real household disposable income will fall by around 3.7% over the course of 2022 and 2023 – the largest such fall on record.

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To pile misery onto families, the Bank forecasts that unemployment will rise by roughly 900,000 people; the Bank sees this as sufficient to keep inflation from becoming entrenched.

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What do today's @bankofengland announcements mean for households? Average real post-tax household incomes are expected to fall by around £2,000 across this year and next. The Government will inevitably need to do more to shield families from the worst effects of this crisis. pic.twitter.com/NN1AxQ5152

— Resolution Foundation (@resfoundation) August 4, 2022

But the big news is the Bank’s grim outlook for this winter, with inflation forecast to peak at 13.3 per cent in October – higher the previously thought. In addition, this high inflation is also expected to last longer, reflecting higher gas prices. pic.twitter.com/mQeQmQ2NCv

— Resolution Foundation (@resfoundation) August 4, 2022

A weaker economy is projected to lead to a rise in the unemployment rate from its current level of 3.8 per cent to above 6 per cent. This, combined with higher and long-lasting inflation, means that real household disposable income could fall by 3.7 per cent across 2022 and 2023. pic.twitter.com/hmvD99wtJT

— Resolution Foundation (@resfoundation) August 4, 2022

Rising energy prices will lead families and businesses to cut back spending on other items, with higher prices overall meaning spending will not go as far. This leads to a significantly weaker outlook for the economy – hence the Bank expecting a recession in Q4 this year. pic.twitter.com/5DfOS77jKN

— Resolution Foundation (@resfoundation) August 4, 2022

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All this lays bare the challenges for the next Prime Minister: although they might hanker after a honeymoon period, the reality is that the deepening economic crisis will be top of their ‘to-do’ list – and in particular providing support focussed on low-to-middle-income households – when they step into 10 Downing Street on 5 September.

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Also coming up today

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The latest US jobs report is due later, showing the health of America’s employment market as its economy slows. Economists predict job creation slowed in July, to 250,000 from 372,000 in June.

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The agenda

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7am BST: Halifax house price index for July

1.30pm BST: US jobs report for July

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Key events

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