UK On Verge Of Recession As Economy Unexpectedly Shrinks

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by Tyler Durden
Friday, May 13, 2022 - 06:45 AM

The UK's economy unexpectedly contracted in March due to high inflation and faltering growth, increasing the country's odds of slipping into recession much faster than anticipated. 

Figures from the Office for National Statistics (ONS) showed the economy contracted by .1% in March. For the quarter, growth printed below expectations at 0.8%. Economists widely expected 1% growth for the quarter, but some feared a recession could be just ahead after the miss. Now economists are wondering how deep will the downturn be. 

"Suddenly, our forecasts that GDP will be flat in both the second quarter and the third quarter seem pretty optimistic. 

"A contraction in GDP or a recession now feels a bit more likely," Paul Dales, the chief UK economist at the consultancy Capital Economics, told The Guardian

UK's monthly GDP growth is slipping into the abyss. 

In March alone, automobile sales plunged 15.1%, resulting in an overall 0.2% decline in services output. 

UK recession threats come as stagnation and inflation have unleashed what some are saying is stagflation. 

Last week, the Bank of England said a recession is likely to hit next year, while the National Institute for Economic and Social Research (NIESR) said earlier this week a recession would emerge in the second half of this year. 

Paul Dales, the chief UK economist at Capital Economics, was quoted by the business newspaper City A.M. as saying new ONS figures suggest a recession by the third quarter. He said a slump in discretionary spending "is particularly ominous," given household incomes have deteriorated at one of the fastest rates ever due to high inflation (now at 7% and could go much higher). 

Bloomberg data shows the Bank of England is on an aggressive hiking path this summer to quell inflation. Hiking into a downturn will add even more pressure on households' finances. The BoE current target interest rate is 1%, and rate traders believe the central bank will hike through year's end to reach 2%. 

Recession fears sent the pound to a two-year low. Meanwhile, the dollar hits two-decade highs and continues to benefit from bets of aggressive rate hikes by the Federal Reserve.

A combination of higher energy prices, a slumping pound, faltering economic growth, weak households, trade restrictions on Russia, and overall elevated inflation have produced a toxic environment for the UK economy that may suggest it's on the verge of a nasty recession. 

Summing it all up: UK is the 'most miserable' since 1994!