U.K. Economy Sputters and Barely Avoids a Recession

It’s a notable upgrade from the bank’s forecast in November, when it expected a contraction of 1.5 percent.

Britain is expected to experience only a shallow recession, far less severe than the one after the 2008 financial crisis or in the early 1990s, because unemployment is forecast to increase less than previously thought and traders anticipate that interest rates will not rise much higher. In fact, the National Institute of Economic and Social Research, a London think tank, presented a report this week arguing that Britain could entirely avoid a recession this year, though the economy will hardly grow.

In the end, whether Britain falls into a recession or not may seem like splitting hairs. The bigger problem is that after years of disappointing expansion, the economy faces more years of lackluster growth because of weak productivity and a smaller work force. The Bank of England said that it didn’t expect the British economy to return to its prepandemic size before 2026.

The economic frustration at the rising cost of living and history of low pay can be seen in streets as workers including nurses and teachers go on strike over pay and strenuous labor conditions. The National Institute of Economic and Social Research has warned of the return of the “squeezed middle,” a large middle class facing higher taxes, mortgage costs and other expenses without the cash transfers received by low-income households.

Successive economic shocks — including the pandemic, and rising energy prices because of Russia’s war in Ukraine — have made Britain poorer, but there is also “frustration and disappointment” among people because for years the economy has performed worse than expected, Jagjit Chadha, the director of the National Institute of Economic and Social Research, said in a news conference this week.

The shortfall in per capita gross domestic product, compared to its pre-financial crisis trend, is “an incredibly depressing picture,” he said.

After the economic turmoil last autumn under the premiership of Liz Truss, which temporarily caused debt costs to soar and the British pound to plummet, there is also a growing concern that the government led by Prime Minister Rishi Sunak doesn’t have a credible strategy to sustainably expand the economy. Meanwhile, the economic cost of Brexit, Britain’s departure from the European Union three years ago, is growing more apparent. And there are fears that the country will be left behind in the green transition if it doesn’t do more to compete with the U.S. Inflation Reduction Act, which is set to draw billion of dollars in investments to the United States.