UK to enter recession in Q4 with inflation at 13% – central bank

MADRID (ICIS)–The UK is expected to enter recession in the fourth quarter (Q4) of 2022 while inflation will stand at 13% by year-end, the Bank of England (BoE) said on Thursday.

The UK’s central bank raised on Thursday interest rates for the sixth consecutive time this year as it tries to rein in inflation, which stood in June at a 40-year high of 9.4%.

The 13% inflation projected for Q4 would be the highest rate since 1981.

The war in Ukraine and the consequent rise in energy and food prices globally is set to hit the UK hard, the BoE said.

“GDP growth in the UK is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the UK and the rest of Europe,” it said.

“The UK is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”

An economy enters recession with two consecutive quarters of negative growth. With negative growth also forecast for Q1 2023, Q4 would mark the start of a recession.

The BoE did not state how long it thinks the recession may last, but some analysts interpreted the central bank’s wording – real incomes falling sharply in 2022 and 2023 – as a forecast for, at least, a year-long recession.

Meanwhile, inflationary pressures are to persist, but the BoE said it expects the main rate of inflation – consumer price index, CPI – to return to the 2% target the BoE sets.

“Inflation is expected to rise more than forecast in the [BoE’s] May Report, from 9.4% in June to just over 13% in Q4 2022, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead,” it said.

The BoE also said it now expects GDP to have fallen by 0.2% in the second quarter, compared to growth of 0.1% it had expected in May.

In Q3, GDP would return to growth with a rise of 0.4%, also slightly weaker than previously expected, and before falling into the BoE’s projected recession in Q4.

Front page picture: View on the Bank of England in London on Thursday
Source: Andy Rain/EPA-EFE/Shutterstock