Is the UK tumbling towards a recession or are we already in one? How can businesses prepare themselves with so much economic turbulence on the horizon?
On Thursday, 24th November, Protiviti hosted a quarterly economic update with economist Dr John Ashcroft (The Saturday Economist) as part of their Tackling Tomorrow Today series.
Since we first chatted with John in March, the consumer price index has risen almost 10%. Although the OECD said the UK economy would grow by 4.4% in 2022, they now predict it'll contract by 0.4% next year. Currently, only Russia's contraction (almost 6%) is worse than the UK's.
What does this mean for UK business owners and workers? What will happen to inflation and wages, and what effect will the war in Ukraine continue to have on the global economy? John Ashcroft provides his insights on this and more in his UK economy and latest news update.
UK Economic Update with John Ashcroft
Global economic outlook
The world outlook showed lower growth with higher inflation, higher interest rates, higher taxes, and higher borrowing in the early part of the year. In addition, a blend of pandemic shock disrupted supply issues, and the war in Ukraine has presented us with a challenging environment for growth.
The International Monetary Fund has been gradually reducing their growth projections; UK economic growth started the year at 4.4% but slipped to 3.6% in April. It slowed again to 3% in July, but the latest October forecast is slightly better at 3.2%.
Inflation across the EU, China, and the US
There’s hope on the horizon where global inflation is concerned. Oil prices have eased and are now trading at a lower cost of $86 a barrel. Gazprom is still squeezing European gas prices — they’re still at a historical peak but could drop by as much as 30% in the first quarter of 2023.
Shipping costs from China to North America have rapidly declined, falling by as much as 90% in the last year. The price of grain has also eased given the passage of product out of the Black Sea to the rest of the world.
Trading and the future of the global economy
World trade growth sits at 4.5% compared to the 10% bounce back it enjoyed in 2021 and could ease even further next year to about 2.5%. John says, “This pattern of slowing world trade and easing of prices to a certain extent is going to ease the inflation outlook for the world and even for the UK economy into next year.”
In China, forecasts have been falling, with 3.2% growth expected — down from earlier estimates of nearly 5% due to the ongoing COVID crisis. Likewise, the US has lowered its growth forecast for this year and into next year. Inflation currently sits at 8%, with an expected slowdown to 5.5% next year.
Growth forecasts were also lowered in the EU, with the European Central Bank (ECB) trailing behind the inflation curve at 10.7%. John expects this inflation to rise, given the squeeze on gas prices in Europe, and believes the ECB will need to raise rates even higher.
UK economic outlook
The newest Office for Budget Responsibility (OBR) forecast shows expected economic growth of 4.2% this year. However, the cost of housing and household services rose by 11.7% in the last 12 months, with UK households paying an average of 88.9% more for energy bills, according to ONS. This has been compounded by the wage freeze, set in motion to help prevent a 1970s-style spiral.
Inflation
Inflation currently sits at 10% in the UK, primarily driven by the energy crisis caused by Russia’s invasion of Ukraine. The cost of oil is predicted to average at $95 through to the end of the year, which should cause deflation into the first half of 2023. The Bank of England has raised interest rates to 3% to help tackle rising rates of inflation, which they predict will drop off sharply from Q2 of 2023 onward.
Labour market
Inflation of unemployment sits at 3.8% (1.3 million people) and is predicted to rise to 4.2% (1.5 million) by 2024. The health and social sector, accommodation and food sector, and retail sector have been hit hardest. John states that these figures should be taken with a pinch of salt, given the high number of job vacancies in the current market.
Half a million people left the UK during the pandemic to return home to Europe, which has left a gaping hole in the workforce. This has compounded recruitment issues in health and retail, and has prompted calls to shake up immigration laws to help fill staff shortages.
Trade
According to John’s UK economic forecast, the UK will continue to see a surplus in services and a deficit in trading goods, which goes from £150 billion this year to £230 billion in 2022. This brings the UK’s net trade deficit to £80 billion this year.
John says: “The deficit in trading goods is increasing in terms of both EU and non-EU. The deficits overall means that the trade balance looks bad as import surge in and UK exports lag.”
Market summary
Global markets have seen a big correction from overvaluations at the start of the year. The US market was nearly 30% overvalued in January and has since dropped by 34%. France and Germany have dropped down by almost 20%, alongside the Asian market, which is down 10%. The pound plummeted after September’s mini budget, causing a selloff in gilts, and sending a shock to UK pension funds. However, this evaporated as gilt yields reduced.
“Is this a UK recession? Well, not yet. But we are braced for higher prices, lower growth, higher rates,” says John, “and maybe we will be slipping, but it could be a relatively modest setback for next year.”
Planning for the future
Top 3 points of focus for businesses moving into 2023
With such a wide range of variables on the table in this UK economy forecast, John advises business leaders to focus on three key areas. Firstly, he recommends continuing to look at supply and pricing in 2023.
He says, “the major challenge at the moment is coping with the supply shock and coping with the challenges of rising prices, the extent of product elasticity, and the extent to which those can be passed on is obviously critical.”
John also recommends that businesses focus on smarter recruitment strategies. Tackling challenges around recruitment and retention will be key, as well as finding ways to motivate the younger workforce.
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Finally, John recommends using the 4.5% base rate for business modelling. He says, “it’s all about understanding where interest rate levels are going to go. Everybody should be modelling the impact of 4.5% base rates with premiums on top of that.”
Keeping cyber security front-of-mind during economic downturns
According to a survey for the UK government, 39% of businesses identified a cyber attack in 2022, the most common being phishing attempts (83%).
“The sophistication is increasing in terms of the hackers and the fraudsters. So, we've got to be ever more vigilant,” says John. This is a crucial time to increase cybersecurity precautions via staff training, robust security software, established security protocols, and specialised IT and tech talent.
Embracing digitisation and automation
“You can't get away from the process of digitisation and the growth of cloud,” John says. “Globalisation is happening at pace, especially in terms of distribution and manufacturing, that's already been happening — they’re talking about putting robot cleaners into the NHS.”
Although digitisation is crucial as we move into the future of business, John still feels it can’t compete with the demand for human labour. He expects continued pressure on the government for a relaxation in immigration laws to fill the labour deficit certain sectors have been experiencing since the start of the pandemic.
For the latest news on the UK economy, visit Dr John Ashcroft at The Saturday Economist or find expert advice on planning for the future of work at Robert Half. For more interactive discussions with industry-leading experts, join Protiviti’s Tackling Tomorrow Today series.
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