UK economic forecasts take a hit amid recession fears

Business leaders have reacted to the latest monthly fall in the UK’s GDP with warnings that while it may not become a full blown recession it will feel like one for many unless urgent action is taken.

The Office for National Statistics has issued the latest growth figures which saw GDP shrink by 0.3% in April, despite hopes from economists there would be positive movement.

It came as data showed that UK goods exports accelerated in April 2022 with increases in exports to the EU rising by 8.1% (£1.2 billion) and to the rest of the world by 6.5% (£0.9 billion). Main factors in increased goods exports to the EU were machinery, transport equipment and fuels (gas and crude oil).

Food, chemicals and material manufactures exports to the EU remained flat in April 2022. OBR forecasts for UK export growth in 2022 were 9% and 7% in imports.

Imports of goods from the EU rose by 4.2% in April driven by increases in machinery, transport equipment and chemicals, but from the rest of the world fell by 2.6% – an overall rise in goods imports of 0.7%. There was a reduction in cars, electrical machinery and other manufactured goods from China.

William Bain, head of trade policy, at British Chambers of Commerce said: “It is heartening to see an increase in the rate of exports to the EU and the rest of the world. Nevertheless, continued progress is needed to meet the Office of Budget Responsibility’s (OBR) forecast of a net increase in UK exports of 9% across the whole of 2022.

“On exports to the EU, the welcome increase of 8.8% since March is driven mainly by fuels and, to an extent, by machinery and transport equipment, but exports to the EU in chemicals, food and material manufactures remain flat.

“On the import side, there are early signals on the potential for delays, due to COVID outbreaks centred around major ports in China, which may impact the flow of certain goods into the UK.”

Comparing the 3 months to April 2022 with the 3 months to January 2022, goods exports to the EU increased by 15% and to the rest of the world by 2.7% – an overall rise of 8.8%. This is line with OBR forecasts from last autumn for export growth (so far) in 2022. Comparing the 2022 data with that in 2018 – the last stable period before EU exit and changes in methodology – exports were 6.1% higher in the 3 months to April 2022 compared with the 3 months to April 2018.

Early estimates for services exports in Q1 2022 reveal a very modest increase of £0.1bilion in that period. However, the overall UK trade deficit widened to £21.4 billion (ex-inflation) in the three months to April 2022.

It comes as the Confederation of British Industry (CBI) published its latest economic forecast with a warning the Prime Minister and Chancellor to take the “vital actions” needed to spare the country from dipping into recession.

The forecast said: “With the cost-of-living crunch showing no sign of abating, airports struggling to cope, national rail strikes on the horizon and Groundhog Day battles with the EU over the Northern Ireland Protocol, there is real risk that the economy stays a ‘distant second to politics’ this summer.”

The CBI’s outlook suggests growth will soften as household spending turns downwards amid dented business and consumer confidence. As a result, the CBI has downgraded its GDP growth outlook significantly, to 3.7% in 2022 (from 5.1% previously) and 1.0% in 2023 (from 3.0% previously).

High inflation is the primary source of weaker growth. CPI inflation reached a 40-year high in April (9%), driven higher by a cocktail of challenges – ranging from supply chain pressures, rising commodity prices and war in Ukraine.

Inflation is expected to remain high into Autumn, rising to another peak in October (8.7%), given a likely rise in Ofgem’s energy price cap. The result is a historic squeeze in household incomes, which will lower consumer spending. This in turn will weaken GDP growth towards the end of this year and into the first half of next year.

Tony Danker, CBI Director-General, warned the need for action was now urgent.

“Let me be clear – we’re expecting the economy to be pretty much stagnant,” he said. “It won’t take much to tip us into a recession. And even if we don’t, it will feel like one for too many people.

“Times are tough for businesses dealing with rising costs, and for people on lower incomes concerned about paying bills and putting food on the table.

“It’s as clear as day that business investment is one of the few bright spots left in our economy. The Super Deduction is one of the only reasons we have staved off the threat of recession for now – there must be a permanent successor.

“We’ve had weeks of politicking with the country standing on the brink of a summer of gridlock.

“There is only a small window until recess. Inaction this summer would set in stone a stagnant economy in 2023, with recession a very live concern.

“We need to act now to install confidence. This can wait no longer.”

Rain Newton-Smith, the CBI’s chief economist, added: “This is a tough set of statistics to stomach. War in Ukraine, a global pandemic, continued strains on supply chains – all preceded by Brexit – has proven to be a toxic recipe for UK growth.

“The bottom line is that the outlook for UK exports remains far worse than our worldwide competitors. This has got to change for the better.

“Business and government must work together to seek growth globally. As demand shrinks, competition for revenue increases. UK business must be more confident in identifying new markets and utilising all the tools at their disposal – be it from the private sector or public sector.

“Government also has an integral role to play.  Against the backdrop of the rising cost of doing business and continuing supply chain pressures, easing trade flows is in everyone’s interests. It’s not just about lowering non-tariff trade barriers in Europe and signing FTAs.

“Post-Brexit regulatory reforms to support growth, innovation and sustainability can build competitiveness. But divergence for the sake of it could introduce further red tape and friction undermining that mission.

“Moreover, we can and must do more domestically to help our exporters too. Now that R&D allocations are known, let’s get that funding out the door quickly to the Advanced Research and Invention Agency and others.”

Imports of goods from the EU rose by 4.2% in April driven by increases in machinery, transport equipment and chemicals, but from the rest of the world fell by 2.6% – an overall rise in goods imports of 0.7%. There was a reduction in cars, electrical machinery and other manufactured goods from China.

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