Cost of living crisis could lead to ‘mild recession’, report warns

There is a rising risk of the UK economy falling into a “mild recession” due to the cost of living crisis, according to the latest economic report from KPMG. In its quarterly report, the ‘Big Four’ accounting firm said that the UK economy faces a number of global and domestic risks. Depicting two scenarios KPMG said in its main scenario, where it assumes a gradual increase in interest rates in the UK, US and Eurozone alongside an increase in long-term interest rates leading to tighter financial conditions for firms and households, it could see GDP growing by 3.2% in 2022 and by 0.7% in 2023. However, it warned that a weaker scenario, depicted in its downside forecast, could see the economy entering a mild recession. Given the “weak outlook, a more severe scenario is a distinct possibility, although a lower likelihood than our main scenario”, it said. The scenario could arise from a potential deterioration across three main headwinds facing the economy, with the main impacts falling on the fourth quarter of 2022. These include: • A potential US recession arising from a significant monetary tightening by the US Fed; • A potential Eurozone recession due to interruptions of gas supplies from Russia, as well as a significant additional shock to global wholesale gas and oil prices; • An ongoing and worsening squeeze on UK household incomes leading to a sharp decline in household consumption. It revealed the recession modelled in this scenario involves a 1.5% fall in GDP in the year between 2022 Q3 and 2023 Q3. It also noted this is “less severe” than other recessions the UK has experienced in the past, especially compared with the Great Recession, which saw a nearly 6% fall in GDP in the five quarters following Q1 2008 . The UK economy would be expected to contract by 1.1% next year, following 3% growth this year, with consumer spending falling by 1.9% in 2023. In addition, the report also noted that recent survey data showed “tentative signs” that the labour market could soon begin to “cool off”. It said hiring difficulties have eased since the turn of the year, according to the latest KPMG/REC Report on Jobs, although they remain at a “high level”. It added that a “key question” ahead of the summer months will be whether the squeeze on household budgets will result in a lower demand for employees as businesses adjust their hiring needs against the backdrop of weaker activity. KPMG said it forecasts a gradual pickup in the unemployment rate, averaging 4.2% in 2022 and 4.6% in 2023.