The UK is heading for recession and rising unemployment and the squeeze on consumers will “probably be much worse” than following the 2008 financial crisis.
That is according to Deloitte UK chief economist Ian Stewart who told the European Hotel Investment Conference in London last week: “We expect a recession. It will be the third in 14 years and the most-semaphored recession in history.
“Inflation is at its highest since the early 1980s and we tend to get recessions around peaks in inflation. The last two recessions – the pandemic and the financial crisis – were unusual for not being marked by inflation.”
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Stewart argued: “Central banks are trying to engineer big slowdowns. A major driver of the post-pandemic slowdown has been labour shortages. Now it will be rising interest rates. After the government’s mini-Budget [in October], we expected UK interest rates to be over 6% by the middle of next year. Now we expect them to be 4%. [But] that will be a big issue in terms of funding. The climate of easy capital is changing.”
He added: “The big concern has been short-term labour shortages, but the Bank of England wants to weaken the labour market. I would suggest we’ll see a turn in the labour market in the next few months. Unemployment is always low on the eve of a recession and tends to be high at the end of it.
“The labour market is going to be different to what we’ve come to know. It’s going to be more challenging.
“The squeeze on consumers will probably be much worse than after the financial crisis. Most householders were on variable‑rate mortgages at that time [in 2008]. Most are on fixed-rate mortgages now and it takes time for interest rate rises to feed through.”
However, Stewart said: “The highest income groups will be able to cope with higher interest rates. The top 20%‑30% of consumers will be in a relatively strong position.”
He noted “the last year has been very good for margins” but Deloitte’s quarterly survey of chief financial officers “shows CFOs expect high operating costs and sharply lower margins”.
Stewart suggested: “Controlling costs and balance sheets will be the top-two concerns. There will be a focus on resilience – not just a business’s own resilience but the resilience of third parties and exposure to third-party risk.”
He also noted the UK “has taken to hybrid working to an extent not seen elsewhere”, pointing to Google mobility data which shows people in parts of London travelling more than 40% less now than pre‑pandemic and 27% less in the UK as a whole compared with just 12% less in Germany.
Andreas Scriven, Deloitte lead partner for hospitality and leisure, told the conference: “Consumers are starting to cut back day-to-day and discretionary spending. We see it with large-cost items and we see people trading down.
“The hospitality industry has held up fairly well in the UK, but in Germany there has been a drop-off already and it’s similar in Spain and France.”
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