UK vulnerable to recession next year, KPMG report warns

KPMG’s latest UK Economic Outlook report, released this morning, suggests the UK could go into a recession next year following a worsening cost of living crisis.

The report warns that a rise in the price of commodities caused by the war in Ukraine and lockdowns in China have impacted global supply chains, increasing inflation and the cost of living — as a result this may trigger a recession.

KPMG forecasts UK GDP will fall to 3.2% from 7.1% in 2021, before decreasing to 0.7% next year.

The Economic Outlook report warns the UK’s GDP could face a 1.5% fall within the year. The report claims that this is likely to happen if there is a decline in UK household consumption caused by inflation, the US faces a recession due to monetary cuts from the US Fed, and oil and gas disruptions cause a recession in the Eurozone.

KPMG suggests that external factors are likely to negatively impact the UK’s major industries, saying: “A sharper deterioration in the external environment – causing a recession in some of the UK’s major trading partners – coupled with a stronger fall in consumer spending in the UK, could see the UK economy entering a mild recession next year.”

The UK economy returned to pre-pandemic levels, however unprecedented geopolitics put a strain on supply chains and the global economy: “The invasion of Ukraine and renewed lockdowns in China put upward pressure on commodity prices while keeping supply chains under strain.

“There are growing concerns that a combination of policy actions to combat inflation and any further fallouts as a result of geopolitical tensions could bring about another recession.”

Business investment is underperforming

The Economic Outlook paper indicates that UK business investment is underperforming: “UK business investment has underperformed since the Brexit referendum in 2016 and following the COVID pandemic. Latest data shows the level of business investment in Q1 2022 was 9.1% below the level in 2019 Q4. The level of underperformance becomes even more pronounced if levels of investment are compared to those implied by pre-2016 trends.”

Geopolitical uncertainty is a main cause of underperforming investment, in addition to tighter monetary policy leading to raised borrowing costs for businesses.

Despite this, overall investment is expected to grow by 5.4% this year, encouraged partly by the government’s ‘super deduction’ scheme, but investment could decline once the scheme ends.

The paper also indicates that a main challenge for businesses will be the ability to hire workers amid a continuing skills shortage, with hospitality, IT and the arts being the worst impacted industries. This environment is likely to mean employee pay growth will persist until next year.

Consumer confidence has fallen

A combination of falling incomes and rising prices has caused consumer confidence to fall. The report suggests this could be offset by a strong labour performance and the fact that households saved £180 billion over the pandemic.

Consumption patterns are expected to shift with a potential fall in non-essential purchasing. Data shows a significant increase in alcohol sales, suggesting consumers are looking for a cheaper alternative to bars and pubs. Despite this, the report suggests consumers still may prioritise experiences they missed out on as a result of the pandemic.