You are using an older browser version. Please use a supported version for the best MSN experience.

As the UK falls into a recession that could soon swallow Europe, this town offers clues on England's cost-of-living nightmare

ABC Business logo ABC Business 29/12/2022 By Lucia Stein

While much of the world anxiously waits to see if their economies will tip into a recession next year, the United Kingdom may already be in the midst of one.

The economy shrank 0.3 per cent between July and September, in what Bank of England forecasts say is the start of a "prolonged period" of negative growth that will last throughout 2023.

Part of the problem is inflation — which is at 10.7 per cent — and proving persistent, feeding through into higher prices for food and housing and demands for higher wages.

The cost-of-living squeeze is being felt all over the world as central banks attempt to tackle spiralling prices with interest rate rises designed to make people spend less.

Pent-up demand from the pandemic, global supply shocks from COVID-19 and the war in Ukraine have created a complex economic situation.

As policy makers attempt to pull the right levers to get the economy back on track, they risk overdoing it, causing consumption to taper off and creating the perfect conditions for a recession.

Many predict much of the world will be in such a scenario by next year.

And the UK could already be leading the way.

"Why is Britain set to be the first country into recession and the last country out?" Labour leader Keir Starmer asked in parliament last month.

The question followed an OECD report that revealed Britain would plunge to the bottom of the table of G7 leading industrial nations for economic growth over the next two years.

It also comes amid tough assessments from some economists about the UK's current economic outlook.

"The UK has effectively become a poorer country, not just poorer than we expected to be, actually just poorer," Institute for Fiscal Studies senior research economist Ben Zaranko said.

The UK's inflation epicentre

Nowhere is the UK's cost-of-living crisis more keenly felt than in Burnley, which is experiencing the highest rates of inflation in the UK.

Anglican Father Alex Frost grew up in the small, northern English town and works as the vicar of St Matthew the Apostle church, a welcoming haven for locals of all walks of life.

Over the past few months, he's noticed a steep spike in requests for help with food and energy bills from households feeling the sting of recent price rises.

"It's impacted [people] across the board. And as we [move further into the winter season], and the children are off to school, it does put community care workers at a high level of warning really [and] concern," he told the ABC.

While the country's inflation rate sits at 10.7 per cent, Burnley's inflation rate hit 11.7 per cent last quarter, according to the Centre for Cities thinktank.

Nearby towns such as Blackburn, Blackpool and Bradford also suffered much faster price rises, prompting concerns the cost-of-living crisis has led to a widening in England's north-south divide.

The median disposable income in Burnley is just 20,500 pounds per year, significantly lower than the national average of 31,000 pounds.

Many in the area are also reliant on fuel to get to and from work and three quarters of Burnley's homes have poor energy efficiency ratings.

"[The cost-of-living crisis] has affected people who you may not ordinarily [go to] a food bank or a food pantry," Father Alex said.

With expectations that about 710,000 households across the UK will struggle to pay for warm clothing, heating and food this winter, residents in Burnley have resorted to cutting back on electricity use as much as possible.

"In my own house, I've got three children, and I'm reminding them to switch lights off," Father Alex said.

"And the heating doesn't go on here till 6pm, which means we have a very cold house to come home to, but we have to adapt to the cost of living that [is affecting] everybody."

'First in, last out'

While the UK's economic situation doesn't technically fit the standard definition of recession — considered to be two consecutive quarters of negative economic growth — some economists believe it is only a matter of time before the UK falls into one.

"I think it's clear that, even if we missed the technical definition of recession, the economic situation is not good," Mr Zaranko says.

In the third quarter of this year, the UK posted its worst drop in living standards since records began.

"I think the big picture is that the UK has suffered a worse downturn and a slower recovery following COVID," Mr Zaranko said.

Mr Zaranko said a combination of factors had contributed to the UK suffering a worse downturn and slower recovery following COVID, including the UK's weaker trade performance, relative to other countries.

"While there are a number of other things going on in the world, most economists think that Brexit is playing a role in that, and the trade barriers with the EU," he said.

Brexit added 210 pounds to the average household's food bill in the two years to the end of 2021, according to London School of Economics (LSE) researchers, because of extra red tape and checks required on imported food.

The central challenge is what economists describe as "adverse terms-of-trade shocks".

Basically, the price of imported goods — such as energy, fuel, gas, and food — are rising at a faster rate than the price of the UK's exported goods, resulting in a yawning current account deficit.

Domestic gas prices are up by 129 per cent and domestic electricity prices rose 65 per cent in the 12 months to November 2022.

While prices dropped over autumn, they are set to increase as winter sets in, driving up heating bills and worsening inflation.

"The UK has actually been fairly well-placed, in the sense that it has more liquid natural gas terminals than other European countries do," Mr Zaranko said.

"But it's been hit by things like disruptions to the energy supply, and Norway — which is one of the main sources from which the UK imports lots of its gas — in particular."

The British government has put a cap on energy prices in an effort to protect residents, although Treasury chief Jeremy Hunt has limited it to six months instead of the originally proposed two years.

That cap will end on March 31, 2023.

"[The adverse terms of trade are] why average household incomes are forecast to fall by 7 per cent over the next two years," Mr Zaranko said.

"This is a central challenge, this painful adjustment to being a poor[er] country because of changes in global economic conditions."

The governor of the Bank of England, Andrew Bailey, has warned that it will take up to two years to get inflation under control, with lower-income households likely to be hardest-hit by the crisis.

'Warm banks' step into the breach

Nicola Larnach began working for local charity, Burnley Together, 12 months ago, initially offering aid to those who were furloughed during the pandemic.

But as energy prices soared this year, she said the charity's efforts have shifted to helping people "get through the winter months".

Many on low incomes are now spending more on "essentials of living" — such as food and energy — as wages struggle to keep up with the pace of inflation.

"We've got lots of warm spaces, so people can go and have teas, coffees in a community environment to keep warm as well," she said.

Warm Spaces or "warm banks" act just as the name suggests, as places where people can gather, for free, in a heated, safe, welcoming environment.

These simple community spots have popped up all over the country with local councils, charities, museums, libraries and National Health Services offering to host people struggling to pay heating bill this winter.

But while the initiative has been welcomed by charities and councils, it has also sparked debate over the necessity of such spaces in place of government action.

"The nation's over-reliance on food banks should serve as a warning to the future that we cannot normalise warm banks as part of our lives," End Fuel Poverty Coalition coordinator Simon Francis told Euronews Green.

Meanwhile, the energy crisis has also exposed existing problems within the UK's economy, according to the chief executive of the Learning and Work Institute in the UK, Stephen Evans.

"We've had more than a decade of relatively weak economic growth and poor growth in living standards, and now that's been compounded by the latest energy crisis," he said.

The UK was the only major country in Europe not to have recovered to its pre-pandemic level this year in terms of the size of the economy, according to Mr Zaranko.

"So, we have been facing a similar hit [to Europe in terms of COVID-19], but off the back of a much-weaker post-pandemic recovery," he said.

Before the UK had a chance to get back on track, gas prices started to surge after Vladimir Putin's invasion of Ukraine, which led to global sanctions.

"Because we import a lot of our energy, necessarily, that means we've got less money left to spend on everything else, which makes it really, really tough for people."

In response, workers have been pushing for increases to their pay packets, prompting nationwide strike action when their demands are not met.

What does this mean for workers?

The wage issue was cast into sharp relief this month when workers took industrial action almost every day, across a range of sectors.

The UK faced widespread disruptions as everyone from postal workers to nurses, security staff and airport employees walked off the job, demanding better pay rises and conditions.

"One of the big challenges we're facing in the UK at the moment, for example, is strike action of workers not being happy with the pay awards that are being offered in the face of high inflation, and … taking industrial action," Mr Zaranko said.

It comes at a strange time in the UK's job market, with businesses struggling to recruit enough staff as a growing number of people leave the workforce altogether.

"The post-pandemic labour market feels pretty weird overall … We've got this situation where we've got record vacancies, we've got employers hiring at record rates, but employment is still 300,000, below pre-pandemic levels, where, in most other advanced economies, it is above pre-pandemic levels," Mr Evans said.

Mr Evans has been following the UK's workforce exodus for months and says there are two main reasons why people are leaving.

"We estimate that there's about 1 million fewer people in the labour market than if pre-pandemic trends had continued and that's mostly driven by over-50s leaving the labour market and also people with long-term sickness," Mr Evans says.

While more research is needed, Mr Evans said those leaving due to long-term sickness may, in part, be a lingering effect of the pandemic, amid growing cases of long-COVID and people suffering mental health conditions.

"Where we are now, the [economic] outlook is bleak … it's going to be a painful couple of years," Mr Zaranko said.

"For households, it's going to be a couple of years being squeezed by energy prices, followed by a couple of years being squeezed by interest rates, probably."

Some pockets of the UK are likely to be harder-hit than others, according to Father Alex.

"I think there was a bit of a celebration that [COVID-19] was all over [this year], but the actual legacy of the pandemic in places of urban deprivation, such as Burnley, [is that] the impacts are massive."


Load Error

image beaconimage beaconimage beacon