UK Narrowly Avoids Recession Amid Living Standards Downturn

12th February 2023

The UK avoided a recession by the narrowest of margins last year, but with household incomes falling, families are still living through a living standards downturn, the Resolution Foundation said on Friday in response to the latest ONS GDP data.

GDP in Q4 2022 was broadly flat, following a contraction in Q3, with weak trade offset by rising consumption and investment. As a result, the UK has recorded the fastest growth of any G7 economy in 2022 (4 per cent), while still being the only G7 economy not to have returned to its pre-pandemic size (down 0.8 per cent since Q4 2019).

However, the UK economy is not out of the woods yet, with both the Office for Budget Responsibility and the Bank of England forecasting a return to recession this year. The picture on living standards is clearer still, with real household incomes on track to fall this year and next off the back of the highest inflation in four decades.

More positively, the sharp fall in wholesale gas prices since the summer are set to drive down inflation later this year, easing the cost-of-living crisis, and boosting the wider economy by giving households more spending power.

James Smith, Research Director at the Resolution Foundation, said, "The UK avoided a rapid return to recession last year by the narrowest of margins. But it is not out of the woods yet, and families are still living through a living standards downturn.

"The longer-term picture is more worrying, with the UK economy yet to return to its pre-pandemic size having suffered a prolonged period of weak growth since the financial crisis.

"However, falling wholesale gas prices offer hope for households and the wider economy - with inflation on track to fall sharply later this year."

Most economist agree that a fall in inflation will not bring prices down but merely stop them increasing so fast. Inflation is almost certain to come down no matter what the politicians do as inflation is a measure of the position between this years prices and last years prices. The comparison will be between the high prices last year and the high prices this year so the percentage is will certainly come down That will not help living standards in the short term.

The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households.

However, one limitation of the CPI is that the consumer goods it considers do not represent all production or consumption in the economy. Therefore, as a basic economic barometer, the CPI is inherently flawed. Currently, the basket of goods includes basic food and beverages such as cereal, milk, and coffee.

Significantly CPI does not include mortgages or rents that large numbers of people pay. So even if inflation numbers get less the cost of living pain will go on or even increase for a while. Perhaps the reason why so many people are striking for higher pay.