Is Britain set for recession or not?

The International Monetary Fund’s turnaround on forecasts of a looming recession in the UK was welcomed earlier this month, but a major credit bureau has brought those fears to the fore again.

The IMF was joined by the Bank of England last month in reassessing the outlook for the UK economy, upgrading forecasts from recession to marginal overall growth for 2023.

But this week, Moody’s warned Britain could slide into a “mild recession” this year along with a handful of other developed economies.

City forecasters are still divided on the possibility of a recession, the outlook of which most say hinges on the future for rate hikes by the BoE – with bond markets forecasting a worrying peak of 5.5 percent from their current level of 4.5 per cent.

While headlines often focus on the impact of rising interest rates on the mortgage market, companies are also facing much higher borrowing and bond costs.

Moody’s highlighted “strong inflationary momentum,” with core consumer price inflation hitting a 31-year high of 6.8 percent in April, alongside unimpressive economic activity in the UK in its assessment of the country’s outlook .

According to the credit bureau, this combination means that the BoE will rise ‘at least’ another 25 basis points to 4.75 percent.

Moody’s said: “We expect the economy to contract by 0.1 percent in 2023 as the impact of higher prices and tighter financing conditions continues to ripple through the economy.

‘Monetary policy…[will] will remain tight in the coming years, which will weigh on consumption and investment.

“Due to the relatively short-term mortgage market in the UK, around half of outstanding mortgages are either floating rate or due to be refinanced at a higher interest rate this year, which will reduce household disposable income.”

The increase in mortgage costs for an average mortgage holder who has to refinance at current rates would reduce disposable income by an average of 7.5 percent, according to the Institute for Fiscal Studies.

Inflation in core services is at a three-decade high and the BoE has hiked base rates 13 times in an effort to bring it under control

The technical definition of recession would require the UK to experience two consecutive quarters of negative GDP growth.

According to the Office for National Statistics, the economy grew by 0.1 percent in the first quarter of this year, despite a 0.3 percent decline in March.

But according to Moody’s, Britain will not be alone among its peers in its “mild” recession, which bodes the same for the US and Germany, as well as “stagnant economic activity” in France and Italy.

It said: ‘Tight financing conditions will lead to a slowdown in global economic growth in the second half of this year and limit the recovery in 2024.

Economic growth is slowing in all G-20 economies, but at different rates.

“We expect very weak growth in the main developed economies in particular.”

The latest available figures, compiled by HM Treasury, show that City forecasters expect, on average, UK GDP to contract by just 0.1% in 2023, before growing by a measly 0.8% next year.

There is disagreement, however, with the scale ranging from the economic outlook for a 1.5 percent GDP slump this year to 0.7 percent growth predicted by JP Morgan.

Growth rates are slowing in developed countries, but Germany and the UK are lagging behind

It’s not just homeowners who are suffering, businesses are too

Thomas Pugh, economist at RSM UK, said the group was beginning to see mid-market companies ‘struggle with the availability and affordability of credit’ as interest rates rise

The average cost of new loans from banks by private non-financial corporations in the UK skyrocketed to an effective interest rate of 5.99 per cent in April, according to RSM UK.

Pugh added: “Our models suggest that if base rates rise to 5.5 percent, as currently priced in by financial markets, it would be enough to push the economy into recession.

All in all, there are reasons to be optimistic about the second half of the year. Inflation should be halved by the end of the year and real household income should start to rise again.

“The big risk, however, is that the delayed effect of the huge rate hike that has already taken place, combined with the risk of further rate hikes, will push the economy into recession later this year or early this year.”

Michael Hewson, chief market analyst at CMC Markets, agreed that BoE policy will be paramount, warning that the bank is “in the embarrassing position of not having good options.”

He said: “If you don’t do anything, inflation will take longer to get out of the system, pushing the consumer further, raising it by 25 basis points to at least show they’re trying to do something, or more aggressively and push the economy into a recession.”

‘While [the BoE’s economic growth forecast upgrade] is welcome news, it’s also important to remember that the bank predicted a two-year recession just over six months ago, so their track record isn’t particularly good.”

Germany has already entered a mild recession, but forecasters are divided on the fate of the UK