You are currently viewing Britain’s economy faces twin threats of rising inflation and risk of recession

Britain’s economy faces twin threats of rising inflation and risk of recession

A general view is seen over the London skyline from Canary Wharf in London, Britain October 19, 2016. REUTERS/Hannah McKay

Join now for FREE unlimited access to

LONDON, June 29 (Reuters) – Britain’s economy is grappling with two major risks in the form of double-digit inflation and a possible recession, leaving the Bank of England in the dilemma of how much it should raise its interest rates further.

The BoE has raised its borrowing costs five times since December and its next scheduled rate announcement will be on August 4.

The central bank said it would act “forcefully” – in other words, raise rates more sharply – if inflationary pressures become more persistent. But he also expects near-zero economic growth over the next three years.

Join now for FREE unlimited access to

Below is a summary of the conflicting challenges facing BoE Governor Andrew Bailey and his colleagues and Finance Minister Rishi Sunak.


Consumer prices jumped 9.1% in the 12 months to May, the most in 40 years, and the BoE expects inflation to hit 11% in October when energy bills will increase again.

The BoE says there is little it can do to stop short-term inflation and that its priority is to prevent higher prices from driving up longer-term inflation expectations, which would make the much more difficult problem to solve.

One of the most-watched measures of inflation expectations — the Citi/YouGov poll — has risen sharply in recent months, but has shown signs of stabilizing or falling. Read more


The main way higher inflation expectations could feed into the economy would be through higher wage settlements.

Workers’ salaries rose faster than usual, mainly due to one-time bonuses paid by employers to retain and recruit staff amid a severe shortage of candidates to fill vacancies.

Total pay, which includes bonuses, rose nearly 7% in the most recent official figures for the three months ending April, up from around 3% shortly before the COVID-19 pandemic. The regular salary has increased by just over 4%.

Both of these measures lag inflation, representing a reduction in the real income of most workers.

Separate figures from XpertHR, a publisher of pay and personnel data, show that agreed annual pay rises in UK workplaces are stabilizing at a historically high rate. Read more


A combination of the pandemic and Brexit has left UK employers in many sectors facing severe staff shortages, another concern for the BoE as it adds to wage pressures.

The official measure of job vacancies has hit record highs month after month, although the pace of increases has slowed, one of many signs that the inflationary heat in the job market has begun to subside. Read more

The BoE also monitors the number of people who stay out of the labor market. This inactivity rate has fallen slightly, contributing to the first rise in the overall unemployment rate since the end of 2020 in the most recent figures, potentially easing inflationary pressure on the labor market.


Normally, a jump in inflation would reflect strong growth in the economy, but not this time.

Prices were already rising around the world as the global economy struggled to reopen after coronavirus shutdowns, and Russia’s invasion of Ukraine compounded the problem by driving up energy prices even further. and foodstuffs.

Britain’s economy contracted in April and March and posted zero growth in February, the first time since the start of the pandemic that it failed to grow in a three-month period. It is about 5% smaller than it would have been had the pandemic not occurred.

Things are set to get worse with the Organization for Economic Co-operation and Development predicting that Britain will post zero economic growth in 2023, the weakest performance of all its member nations except for the stricken Russia. penalties.

Finance Minister Sunak in May increased government support for households struggling with rising costs of living and he is under pressure to do more later this year.

Join now for FREE unlimited access to

Written by William Schomberg; edited by John Stonestreet

Our standards: The Thomson Reuters Trust Principles.

Leave a Reply