United Kingdom – 2021-2023 scenario: stagflation and a risk of recession
- Focus – Exposure to the war in Ukraine
- Recent economic trends
- Outline of our scenario
The Russian invasion of Ukraine has undermined the global economic outlook. The crisis will negatively impact the United Kingdom, a relatively open economy and net importer of gas and oil. Household consumption will be affected by the rise in the cost of living, private investment will be impacted by uncertainly, surging production costs and monetary and financial tightening, and exports will be hit hard. As such, we have significantly revised our forecasts, upward for inflation and unemployment, and downward for growth. We expect zero growth on average in the second and third quarter 2022, with inflation rising sharply above 8% in spring.
Rising living costs will have a severe impact on household consumption. We expect real disposable income to fall by 3.5% on average this year (peaking at -4% YoY in Q3) owing to increased inflation and fiscal tightening and a correction in risky financial assets. This magnitude of decline in real income would normally lead to a dip in household consumption and an economic slowdown, but the savings buffer built up during the pandemic should enable household consumption to resist in aggregate terms at close to but slightly above zero. On average, household consumption is expected to grow by 4.9% in 2022 and 1.5% in 2023 after 6.2% in 2021, remaining the main contributor to GDP growth.Slavena NAZAROVA, Economist