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Government's failures will trigger a recession, economists warn

Rishi Sunak is driving Britain into a recession through his failure to tackle the cost-of-living crisis, top economists have warned.

The economy will shrink in the second half of the year, according to the National Institute of Economic and Social Research (Niesr), in part because of the Chancellor's reluctance to prop up consumer spending with tax cuts or support for households.

Niesr predicts that inflation will soar above 8pc and unemployment will increase to above 5pc as the country is hammered as part of an international slowdown.

Its forecasters also expect Russia’s war in Ukraine to slam the brakes on global growth, costing the world economy $1.5 trillion of output.

Britain’s GDP will fall by 0.2pc in the three months to September and another 0.4pc in the final quarter of 2022 as “stagflation” threatens, before returning to years of mediocre growth.

Mr Sunak had the room to spend more or hold back tax hikes in his Spring Statement, Niesr said, which would have helped to “reduce the likelihood” of the economy going into reverse. Stephen Millard, an economist at the think tank, said: “The Chancellor had the chance to help poorer households, to do something about this.

“But he chose not to. He chose instead to pay for the Covid assistance, the added fiscal support, by running down the deficit.”

Living standards are expected to slump, with real disposable household incomes to drop 2.4pc this year. An extra 250,000 households will fall into destitution, taking the total to around 1m.

Mr Sunak’s own fiscal rules gave around £10bn of headroom at the time of the Spring Statement beyond those measures he chose to take, such as cutting 5p from fuel duty, Niesr said.

Mr Millard - who used to work at the Bank of England - said that Threadneedle Street has kept interest rates too low for too long, contributing to this year’s burst in inflation.

He said: “They really should have been tightening last year. Because they were not, that has helped add to the inflation we have seen."

The retail price index measure of inflation could hit 14pc later this year, with serious implications for the Government’s finances as interest payments on one-quarter of the national debt are tied to RPI. It would also have dire consequences for commuters, whose season ticket costs are begged to the rate.

The warning came as Deutsche Bank said the UK is “flirting with recession”. Economist Sanjay Raja warned of a “modest contraction” in the second quarter.

He said: “The real disposable income shock, as well as the mounting terms of trade shock, lower Covid health spend and the extra June Bank Holiday should be enough to send the economy into reverse.”

Global inflation will hit 8.2pc this year, Niesr predicts. It expects GDP to grow by 3.3pc, well below the 4.2pc expansion anticipated before the invasion.

It came as Reuters reported that Brussels is drawing up plans to tide Ukraine over with €15bn (£12.8bn) in cheap emergency loans.

Ukraine has already incurred almost $92bn in damage to its infrastructure as a result of the conflict, with total economic losses at $600bn or higher according to analysts at the Kyiv School of Economics.

A Treasury spokesman said: “We’ve had a strong economic recovery from the pandemic which has put us in a good position to deal with these global challenges we are facing.”

“But these are anxious times and while we can’t shield people entirely, we are taking action through support worth over £22bn this financial year.

“Public debt is at the highest levels since the 1960s and rising inflation is pushing up our debt interest costs, which means we must manage public finances sustainably to avoid saddling future generations with further debt.”


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