Could the UK be on the verge of a recession?

Inscription recession, currencies dollar and declining chart as risk of global financial crisis caused by coronavirus. Covid-19

With the Covid-19 pandemic, evolving supply chain issues, and an ever-divided nation juggling a plethora of challenges, the UK economy could feel the force of the mounting difficulties.

Business Leader spoke to some industry experts to see what it all means for the UK GDP and the continued logistical nightmare retailers are currently facing.

What does the GDP data reveal?

In line with the GDP figures which showed UK GDP rose by 0.4% in August 2021, Emma-Lou Montgomery, Associate Director at Fidelity International, shared her thoughts.

August’s 0.4% growth marks a small rebound on July’s stalling GDP figures, yet the worry remains that economic growth won’t even be in touching distance of pre-pandemic levels until well into next year. Shortages of HGV drivers and supply-chain disruption continues to trouble multiple sectors and is clearly dampening consumer confidence. Forecourts and shelves have been left empty, with mass recruitment drives yet to attract the number of staff urgently needed. This all comes in the crucial lead up to Christmas, when suppliers and retailers should be firing on all cylinders. But with households facing steep price rises for everyday items, from the food shop through to the gas bill, there will be little desire – or capacity – to spend, spend, spend.

Policymakers will be keen to avoid this troubling mix of slow growth and rising prices from settling in for a sustained period of time, but this ‘stagflation’ doesn’t look like it will be going anywhere fast. There is a lot for the Chancellor to cover in The Treasury’s spending review and Budget announcement in a couple of weeks’ time, and he will undoubtedly aim to quell concerns while firming up faith in the UK economy. However, it’s what’s ahead that is concerning economists even more, with potential further hits to GDP lurking just around the corner.

Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown provides her analysis of the GDP figures.

Festivals fans enjoying new found freedom in August and strong campsite bookings helped lifted economic output, with the arts entertainment and recreation sector growing by 9%.

But the economy can’t rely on happy campers to sustain growth, given the storm clouds that have gathered over supply chains since the summer.

It’s likely that the 0.4% growth in economic output overall in August was partly put due to the mini bounce back from the pingdemic which pushed a million people into self isolation in July.  Weakness is seeping through these figures especially in the construction sector which shrank again for the fourth month in a row, by 0.2%. Widespread reports of raw material shortages is likely to have been partly to blame, as well as the difficulties of getting boots on the ground in building sites as sectors fight for skills, with 1.1 million vacancies opening up between July and September.

Output was still estimated to be 0.8% below pre-pandemic levels in August, and the price rises, fuel shortages and labour shortages are potholes in the road which are likely to have put a brake on growth in September.

It certainly won’t be an easy ride for Bank of England policy makers when they meet next to decide when to raise interest rates. Moving too sharply could see the economy go into reverse, but the Bank won’t want to risk losing credibility if prices keep accelerating.

Could there be a recession by the end of 2021?

John Hardy, Head of FX Strategy at Saxo Markets, warns that the underwhelming economic growth rate and the backdrop of being in an energy crisis and supply chain deficits suggests concerns that a recession is incoming.

There is considerable tension between the traditionally positive rising expectations of a string of rate hikes expected from the Bank of England and the negative current backdrop for the UK being: the sense of isolation from Brexit, capacity constraints in the economy, the country getting the worst of the ongoing European energy crunch, the yawning external deficits.

The market has not responded consistently to a usually positive spike in short UK rates, and eventually, the concern will arise, together with the government’s attempt to cobble together credibility on the financial front, that a recession is incoming.

The latest twist in the never-ending Brexit story is the ongoing situation in the customs arrangement for Northern Ireland, where the situation on the ground means little interruption of trade and the softest of customs borders on the island but a de facto customs border in the Irish sea. The UK is drawing up red lines on the issue and France is in a fighting mood over fishing rights, so accidents may yet happen.

Continuing supply chain challenges

Rishi Sunak stated earlier this month that government ministers are doing “absolutely everything we can” to fix supply chain issues in the UK, as retailers and logistics companies warn supply chain disruptions are spreading to other container ports increasing the likelihood of potential shortages during Christmas shopping season. Tom Sommer, Director at ChannelPorts – a Customs Clearance Agent supporting businesses to import and export goods in and out of the UK and Europe – shares his thoughts with Business Leader.

The mounting concern over Christmas supply shortages comes as no surprise. There’s currently shortages of over 100,000 lorry drivers in the UK which is a key player in the logjam of shipping containers. In the lead up to Christmas, I fear this issue is only going to accelerate. Covid-19 is also a major contributing factor; the booming of e-commerce and demands for the delivery of goods versus a backlog of HGV driving tests and travel restrictions has been a recipe for disaster. Brexit amplified HGV driver shortages in the UK particularly, as once the UK entered the single market European drivers can no longer pass through easily.

These issues however, merely catalysed a prevailing problem. Shortages have been a long-standing issue for the past decade on a global scale; only recently did Boris offer over 5,000 visa’s with less than 200 names put forward. Just by looking at the truck driver demographic, there are few young people interested in these solitary, low-paid roles, and it’s no wonder larger corporations with shiny offerings of higher bonuses are easily poaching drivers from smaller companies.

Though government ministers say they’re fixing the problem for Christmas, the real question is whether they have the appetite to fix these issues in the long-term. With the development of automated driverless vehicles coming into play over the next few decades, perhaps there is little urgency to seek a long-term, effective solution.

Christophe Pecoraro, Managing Director at PFS Europe, speaks about how retailers can mitigate against the perfect storm of supply chain disruptions.

If Brexit and coronavirus weren’t enough for retailers to contend with this peak, the ongoing supply chain disruption certainly will be. Indeed, fears around Christmas stock shortages are mounting after Felixstowe, the UK’s largest container port, was forced to turn away shipping containers carrying toys and electric goods due to a lack of capacity and the HGV driver shortage. This combination of events could spell disaster for retailers and brands trying to keep on top of demand and delivery in time for Christmas, with empty shelves looking like a strong possibility.

If retailers and brands are to overcome these challenges and maintain resilience during peak 2021, they will need to have more than one contingency plan in place. Multi-node fulfilment operations and temporary pop-up, or micro-fulfilment centres across various locations (including in-store) are just a couple of solution considerations. These infrastructures enable brands to spread inventory and avoid further delays further down the line. Shortening the supply chain can vastly reduce the transit time for goods, removing much of the uncertainty involved in last-mile delivery, minimising shipping delays and avoiding increased transportation costs.

Keeping up-to-date real-time inventory records will also be crucial to staying one step ahead. Distributed Order Management (DOM) system will ensure your order management system (OMS) can divert orders to the appropriate inventory pool – depending on several factors – including delivery address and product type. Regular comparisons of in-store data with the digital will have a significant impact on your ability to keep orders moving to meet consumer demand.

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