Savings to be obliterated amid threat of 'stagflation' in UK

Research institute NIESR sounds warning on impending recession

The National Institute of Economic and Social Research expects inflation to peak in the last three months of this year. EPA
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The savings of millions of people in Britain are set to be wiped out by the rising cost of living, a report has warned.

The UK is set to enter a recession which will hit millions of the most vulnerable households, especially in the worst-off parts of the country, the National Institute of Economic and Social Research (NIESR) said.

More than 2.5 million households will have their savings obliterated, it found, meaning that one in five UK households will have no savings by 2024.

The institute also said the number of households living from salary to salary would nearly double to 6.8 million, from 3.9 million, or 25 per cent of all UK households, in 2024.

The Bank of England is expected to raise interest rates by up to 0.5 percentage points this week in an attempt to bring inflation under control.

Gross domestic product is set to shrink in the third and fourth quarters of this year, and in the first three months of next year.

The Bank of England is expected to raise interest rates by up to 0.5 percentage points this week in an attempt to bring inflation under control. AFP

The report warned of a “three-quarter technical recession, but a relatively shallow one”.

However, it also said there was an “increased possibility of a deeper recession”.

The threat of stagflation, a nightmare of economists, has returned for the first time since the 1970s, the report said.

Stagflation is where an economy experiences slow growth, high unemployment and rising prices.

The economy is expected to grow this year, the NIESR said, but only by 3.5 per cent, before slowing to 0.5 per cent next year — far from an emphatic bounce-back from the pandemic.

The report found that inflation will peak around the last three months of this year.

Consumer price index inflation will reach close to 11 per cent, but will fall back to 3 per cent by the end of 2023. Inflation currently stands at 9.4 per cent.

“The UK economy is heading into a period of stagflation with high inflation and a recession hitting the economy simultaneously,” said Prof Stephen Millard, NIESR deputy director for macroeconomics.

He called on the Bank of England to try to bring inflation under control — interest rates of 3 per cent will probably be necessary for that — and for the new chancellor to support households hit by the recession and cost-of-living squeeze.

Demonstrators hold placards during a 'We Demand Better' rally in London. Getty

Prof Adrian Pabst, deputy director for public policy at NIESR, said: “All households are facing soaring energy and food bills but too many have to resort to credit, build up payment arrears or see their savings wiped out.

“The incoming administration needs to provide immediate emergency support to the 1.2 million hardest hit households and the one in five households that will become financially vulnerable as the energy price cap is lifted and the recession begins to bite.”

The report forecast that real incomes will be permanently lower, dropping 2.5 per cent in 2022 alone.

Real incomes will be 7 per cent below where they were headed before Covid by 2026, it said.

About 3 per cent to 5 per cent of this hit will come from Brexit while 1 per cent to 3 per cent will come from energy price rises and the remainder from government policy.

The report called for the government to increase universal credit payments by £25 a week for at least six months from October, which would cost about £1.4 billion, and also to increase energy bill relief payments from £400 to £600 for 11 million poor households, with the total costs amounting to £2.2bn.

The research shows that between the impact of inflation and the refusal of the government to raise benefits in line with inflation, the 10 per cent poorest households will be about 5 per cent worse off, despite the support they have been promised on energy bills.

It makes them the worst hit of any income group in society.

Updated: August 03, 2022, 11:40 AM
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