UK households are heading for a recession as the worst cost of living crisis in decades shows no sign of slowing down, according to the Confederation of British Industry (CBI).
The business trade body has significantly downgraded its GDP growth outlook to 3.7% in 2022, from 5.1% previously, and 1% in 2023 from 3% previously.
High inflation is the primary source of weaker growth, with the record high cost of living resulting in a “historic squeeze” in household incomes, which will lower consumer spending, CBI warned.
“We are about to see households go into recession,” CBI director-general Tony Danker told journalists.
High inflation means real household disposable incomes fall by 2.3% over 2022 – marking the largest annual decline on record since the mid-1950s.
“In other words, consumption to go negative and this in turn will weaken the growth for the end of this year and the first half of next year. We may avoid technical recession mainly thanks to business investment at the moment being high due to the super-deduction,” Danker added.
The so-called “super deduction” that was introduced by the chancellor during the pandemic gives businesses tax relief for investments into business development and equipment purchases.
It allows companies to cut their tax bill by up to 25p for every £1 they invest.
Capital spending is set to fall away in the second half of 2023 as the super-deduction ends, which has prompt CBI in several occasions to call for a permanent investment incentive to support growth into next year.
“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,” Danker said.
He warned that businesses across the UK are freezing investment decisions, which is hitting the economy.
“The thing that’s happened since the war began is that firms are in pause mode. They have just paused on investment.”
CBI is also seeing global businesses shunning the UK as Brexit and the Northern Ireland Protocol debacle continues to erode trust.
“We do see global firms sort of shorting on the UK right now. They look at the UK, the combination of a bit of Brexit worries again, some of these figures from the OECD and go ‘maybe the UK is not the best place to invest right now’”, Danker said.
He urged to government to strike a deal regarding the Northern Ireland protocol impasse, adding that “now is not the time for grand standing, it’s time for a deal”.
CBI is also predicting the unemployment rate to rise slightly to 4.1% by the end of 2023 from its current level of 3.7%.
“Let me be clear – we’re expecting the economy to be pretty much stagnant. 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," Danker said.
CBI is calling on chancellor Rishi Sunak to build momentum behind business investment ahead of the autumn budget by making a full commitment to a permanent successor the super-deduction and cut approval times for new offshore wind farms from four years to one.
It is also urging government to “act as an honest broker” between rail companies and unions to find solutions to avoid a summer of train chaos.
The trade body also wants to see Downing Street take “immediate steps” to alleviate labour and shortage skills and add “immediate flexibility” to the apprenticeship levy for one year allowing all employers in the country to use their levy funds to tackle labour shortages.
The Bank of England looks set to raise interest rates this Thursday for the fifth time since December, its steepest run of rate hikes in 25 years, and is likely to keep going in the coming months as inflation heads for double digits.
Watch: What is a recession and how do we spot one?