RITAIN has met the first half of the technical recession definition, meaning there is a risk we are headed for a summer recession.

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The Bank of England thinks the country will tip into a 15-month long recession at the end of this year - the longest since the financial crisis.

Figures published last week by the Office for National Statistics revealed the UK economy shrank 0.1 per cent in the three months to June.

Another contraction in this quarter would tip us into an earlier downturn and there are signs this may happen.

One of the biggest drivers for the second quarter output drop was households reining in spending in response to their pay being eroded by elevated inflation and tax hikes.

This softening in consumption comes before the huge rise in household energy bills in October.

Inflation averaged over nine per cent over the same period, delivering a 4.1 per cent hit to households' spending power, the biggest since record began in 2001.

"Cracks in the economy are appearing", with the UK's consumer-facing firms stalling in the three months to June, Sanjay Raja, senior UK economist at Deutsche Bank, said.

"Inflation is already [in] the double digits and consumer confidence is at record lows, so headwinds from the income squeeze are already ratcheting up," analysts at HSBC said.

The Bank of England thinks that the energy bill hike will shove inflation to over 13 per cent, more than six times its two per cent target. But, that projection looks like it may be smashed after this week's big 10.1 per cent overshoot.

Governor Andrew Bailey and co thought prices would rise 9.9 per cent in July. It is common for Threadneedle Street wonks to get their inflation forecasts wrong.

The savings rate has held relatively high. Economists have been betting people would raid these warchests in response to higher living costs.

A persistently elevated savings rate indicates households are preparing for a tough winter by halting purchases now to keep money aside to foot elevated energy bills. If that trend continues, there is a chance GDP also drops in the current quarter.

"Given record lows in consumer confidence, and also rising interest rates it's possible that overall household savings will not fall by as much as we expect in our central case. If so, the outlook will get gloomier still," HSBC added.

But, June's month-on-month GDP was shallower than expected - 0.6 per cent versus a 1.2 per cent expected fall - suggesting the economy does have some underlying strength.

S&P Global's purchasing managers' indexes are still above the 50 point threshold that separates growth and contraction.

One bright spot has been the jobs market.

Hiring decisions are typically based on expectations of future demand. Vacancies are running at historically high levels, indicating firms still think adding additional workers is a profitable move. Unemployment is at a historic low.

But, ONS figures this week showed job openings dropped for the first time since August 2020.

While bad for employment, this trend may ease wage pressure by forcing workers to accept jobs that offer lower pay.

Consumer confidence is also at a record low minus 44 points, according to research firm GfK, meaning job moves are likely to cool as workers prioritise retaining a steady income amid the cost of living crisis.

The first round of government support for the poorest landed recently.

And the higher national insurance threshold will bump pretty much all workers' take home pay, which should partly protect spending in the current quarter. Tory leadership rivals Liz Truss and Rishi Sunak have pledged more support for households over the winter.

"With fiscal support likely to be scaled up considerably by the next PM and high income households still holding substantial savings, we think that GDP will flatline through the winter, rather than fall," Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.

Economists have highlighted that the 0.1 per cent GDP drop last quarter was primarily driven by government spending Covid-19 measures falling off a cliff. Stripping that expenditure out, the private sector is actually doing pretty well.

Winter government Covid-19 related spending may jump. But, over the summer, it has been pretty much non-existent, depressing GDP.

Another contraction in the current quarter would tip Britain into a technical recession

(c) 2022 City A.M., source Newspaper