By Luke Bartholomew

WHEN Chancellor Jeremy Hunt delivered his budget earlier in March, he was proud of the fact that the UK had dodged a "technical" recession. "The declinists are wrong," Mr Hunt announced, "and the optimists are right."

But how much does this apparently good news matter? With 10 per cent inflation causing a cost-of-living crisis, plus rising interest rates, not to mention the "great salad crunch" playing out across our supermarkets, this may not be a "technical" recession, but it certainly feels like one. So, what happens next?

Usually, politicians and central bankers try to support economic growth. But with runaway inflation, a recession may be the necessary evil needed to reset inflation. For now, the UK economy continues to splutter on which means inflation may be stickier than expected.

Indeed, headline inflation jumped in February as there has been no drop in energy and food costs. Core inflation, the figure with food and energy costs stripped out, has also increased suggesting that underlying inflation pressure may be harder to squeeze out.

It is also worth noting that the UK has a vacancy rate of over 1.1 million jobs, which is putting upward pressure on wages, even if wage growth is still lagging behind inflation.

In the second half of 2022, the UK’s monthly GDP figures were very volatile, which was blamed on a series of unexpected events.

The economy contracted in September, which was put down to the extra bank holiday for the funeral of the late Queen. The GDP expansion in November was thought to be because of the money spent by football World Cup viewers, while December’s contraction was blamed on increased industrial action. In January, GDP grew once again, perhaps because there were fewer strike days.

There are glimmers of good news. Both the services and manufacturing industries are showing upticks in activity and the overall business confidence indicator, which is an important leading indicator, has shown positive movement.

But looking through this volatility, the economy seems to be plateauing into a stagnation around the 0% mark. Granted, a stagnation is better than the winter of recession and discontent that many had expected, but the outlook ahead is very challenging.

Even if the economy avoids a technical recession in the year ahead, inflation will bring a wind-chill factor that means conditions will certainly feel recession-like. The Bank of England believes unemployment needs to increase to return us to inflation of around 2%. So, despite the weak economic outlook, the BoE has prescribed hefty interest rate rises – up from 0.1% in November 2021 to 4.25% now.

The full impact of these higher rates has yet to be felt by the economy, especially around house prices, the undoubted UK barometer of how wealthy people feel. When the effects do come through and house prices slow with rising mortgage costs, we expect the UK economy to brake further.

The impact of this should be higher unemployment numbers and lower wage growth the Bank of England is looking for. The "silver lining" is that this recessionary environment will bring inflation back under control, so interest rates can then be lowered once again. But as this will leave people with less money to pay for their expensive heating, electricity and grocery bills, it will certainly be a painful process.

Nonetheless, there is a dogged determination to the UK’s economy. Recession continues to be staved off by a nation that, despite all the economic pressures, continues to go shopping, go out, borrow money, innovate, create new products and create demand for those products. It is easy to forget, amidst the gloom and doom, that the UK has the third largest tech sector in the world and continues to pull its weight across a range of industries from healthcare to construction to fashion.

So, as we contemplate the likelihood of another year of weak economic performance, it is the responsibility of policy makers to look beyond our current issues and implement the kind of supply-side reforms to boost productivity and growth that will build on the UK’s strength and deliver long-run prosperity.

For now though, all eyes are likely to be focused on those all-important inflation numbers. Should inflation surprise to the upside once again, then it is likely that investors will price in yet another interest-rate hike in May.

Given the recent concerns about the banking system, with several high-profile banking casualties in the US and Switzerland, the possibility of a further increase in rates could keep markets very jittery over the coming months.

Luke Bartholomew is a senior economist at abrdn