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UK economy faces recession risk amidst inflation and unemployment concerns

UK economy faces recession risk

The United Kingdom's economy currently teeters on the precipice of a recession. In the third quarter of 2023, the growth rate of the Gross Domestic Product (GDP) plummeted to -0.1%, marking a stark contrast to the 0% recorded in the preceding quarter. This worrisome trend signals the UK's proximity to a technical recession, defined by two consecutive quarters of negative GDP growth.

Analysts from Wells Fargo underscored the persistently challenging economic landscape in the UK. They observed a slight contraction in GDP during the third quarter of 2023, and the commencement of the fourth quarter displayed a subdued economic sentiment.

Despite some improvements in consumer fundamentals and sentiments, these experts assert that a technical recession in the UK appears more probable than its absence.

In recent months, the UK experienced inflation rates consistently surpassing forecasts. Notably, however, wages also exhibited an upward trajectory at a pace exceeding initial prognostications. Wells Fargo analysts acknowledged these positive shifts but cautioned that wage inflation might still be too elevated to durably achieve the 2% inflation target set by the Bank of England. The longevity of this more restrained pace of price growth remains uncertain.

While the Bank of England (BoE) has committed to maintaining interest rates at a higher level for an extended duration, the actual scenario may unfold differently. The deceleration in both economic growth and inflation in the UK suggests a potential for an earlier interest rate cut than initially projected for August 2024. Analysts from Wells Fargo suggest that the first rate cut by the Bank of England might materialize in June, possibly even in May.

Wells Fargo's forecast for the UK's GDP anticipates a modest growth of 0.5% in 2023, followed by a meager 0.1% in 2024. This outlook remains unchanged even in light of improved sentiments in key sectors of the economy, emphasizing the persistent challenges the UK faces on the economic front.

In conjunction with the anticipated economic stagnation in the United Kingdom, concerns arise regarding employment. The prospect of an economic downturn raises the possibility that securing employment may become more challenging for the British populace.

According to projections from HSBC's bank analysis office, the unemployment rate in the UK could escalate from its current 4.2% (based on October data) to 5% by the close of 2024. Furthermore, by 2025, the unemployment rate might even reach 5.4%.

Despite the economic headwinds, there are glimpses of hope, particularly in the realm of inflation. Consumer Price Index (CPI) inflation in the UK witnessed a decline to 3.9% year-on-year in November, down from a local peak of 11.1% the previous year. Economists at Wells Fargo cautiously interpret these shifts as positive surprises, especially concerning the potential return of CPI inflation to the targeted 2%.


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