The UK’s economy appears to be shrinking at the fastest rate since 2009, promoting experts to warn of a ‘mild recession’ coming our way. It’s estimated that there is about a 50% chance of slipping into recession within the next 18 months.
A thinktank found that economic growth would slow to 0.2% in this quarter, down from 0.6% in the last three months. This is expected to remain stagnated for the rest of the year.
The National Institute of Economic and Social Research (NIESR) assessed that 320,000 jobs would be lost in next year’s third quarter. This would kick start the threat of the economy falling into a recession within the next year and a half.
NIESR said that this could be due to less business investment after the uncertainty and fears of Brexit as this would disrupt business and trading for many companies.
Simon Kirby, principle research fellow at NIESR said “we expect the UK to experience a marked economic slowdown in the second half of this year and throughout 2017. There is an even chance of a technical recession in the next 18 months while there is an elevated risk of further deterioration in the near term.”
He also warned policymakers not to focus only on the short term effects of the recession and to focus instead on the larger problems of prolonged uncertainty.
Inflation is also set to increase for the first time in five years, to more than 3% next year. This is due to the weakening of the pound which will push up the prices of imports and government borrowing.
Interest rates cut
The Bank of England has recently announced cuts to interest rates at a record low of 0.25%, down from 0.5%. This is the first cut since the 2009 cuts that were made to cushion the blow of the financial crash. The rate changes are to combat current and predicted low growth and has been expected ever since the Bank of England announced changes to forecasts for economic growth drastically.
After the Brexit vote, the Bank’s monetary policy committee attempted to mitigate the effects by putting together a four-point plan. This includes the cuts to interest rates as well as plans to use an additional £60bn to buy government bonds, a £10bn to buy corporate bonds and a £100bn to fund banks that will help to pass on base rate cuts to the real economy. This is will allow banks to be able to provide loans at interest rates close to the new rate of 0.25%.
Is Brexit really to blame?
The move to cut interest rates and the disappointing growth of the economy both contradict assurances from George Osbourne that the economy is in a great place and is strong enough to withstand the effects of Brexit. In reality it has brought a sense of instability and uncertainty which appears to have impacted growth.
Uncertainty has led to hesitancy for some to invest in the UK, with some companies threatening to leave it in favour of cities in mainland Europe. The Eurozone business activity has been better than expected, improved by a strong performance from Germany, which has made up for stagnation in France and elsewhere.
Less output from manufacturing industries
Brexit may not be alone in contributing to the lack of economic growth. The manufacturing industry has suffered from a decline in productivity, the lowest level since April 2009, which has then contributed to the sorry state of the economy.