Bloomberg | | Posted by Lingamgunta Nirmitha Rao
Britain is probably already in a recession after soaring interest rates and rising unemployment turned households more cautious about spending, according to an analysis by Bloomberg Economics.
The researcher estimates that there’s a 52% chance of a mild recession in the second half of this year, as defined by two consecutive quarters of contraction. The analysis was published Monday ahead of official data on gross domestic product due Friday.
A recession would be a headache for Prime Minister Rishi Sunak, due to fight an election next year. A recession could increase the chances of the Bank of England pivoting toward reducing interest rates, especially if inflation has come down sharply.
“It will be a close call between stagnation and a mild contraction, but the odds are tilted marginally in favor of the latter,” Dan Hanson, an analyst at Bloomberg Economics, wrote in a note published Monday. “The risks are that the fall in output is a little sharper than we have penciled in.”
Economists have predicted that GDP slipped 0.1% in the three months through September, a Bloomberg survey found as of Friday afternoon. The BOE expects unemployment, now 4.3%, to rise to 5.1% by 2026.
“With the labor market loosening, consumers may feel more cautious about spending,” Hanson said. “This is even as their real incomes continue to rise over the winter. The September money and credit data from the BOE points to households saving more than they have in the recent past.”
Hanson joins a handful of forecasters predicting a recession in the UK. Surveys have indicated a slump in output in the second half of the year and a sharp drop in job vacancies.
The model by Bloomberg Economics — which already has a mild recession in its forecasts — suggests a 70% probability of a contraction in the third quarter after a 0.6% fall in GDP in July and only a partial rebound in August. The Bank of England last week estimated a 50% chance of a recession in its forecast period.
Hanson said the prediction is based on a “model that uses high frequency data and historical experience to capture the distribution of risks around the near term outlook for growth.”