This week’s forecasts for the UK economy from the Bank of England were quite simply shocking. The bank forecast that the UK economy is heading for a 15-month recession, an inflation peak of 13 per cent and the worst hit to household living standards in 60 years. The scale of the recession – measured by the fall in GDP – would not be as bad as during the financial crash, it said, but the drop in household incomes would be greater.
It is a gloomier outlook than for the United States – where the latest jobs figures were surprisingly positive – or the euro zone, which could yet slide into recession if Russia cuts off gas supplies over the winter.
Assuming Liz Truss wins the race to be Conservative Party leader, and thus the next prime minster, the news sets up conflict with the Bank of England, which she has criticised for letting inflation get out of control. Truss has promised tax cuts to put money back in people’s pockets, but at the same time the bank has vowed to press ahead with higher interest rates to choke inflation, even as the economy slides into recession.
The European Central Bank may face a similar dilemma in the months ahead. In the longer term, recession will hit the UK’s public finances and sharply constrain the room for manoeuvre of the next prime minister. With a trade war in prospect with the European Union, meanwhile, the economic cost of the disastrous Brexit policy will only worsen.
What does this mean for Ireland? First, while the Irish economy is in a significantly better position than the United Kingdom, the gloomy nature of the Bank of England forecasts shows a bleak assessment of the impact of many of the same economic forces at play here. Second, companies selling to the UK economy are going to find the going a lot tougher. Smaller firms, and the Irish food sector, depend on the UK market for about a third of their exports. If this market is shrinking, then both sales and profit margins will come under pressure. If the rest of the EU, too, slides into recession, then maintaining much economic momentum here will become difficult indeed.