The Bank of England has issued a warning saying that the UK will fall into recession this year as it raised interest rates by the most in 27 years. The forecast hints that the last three months of the year will witness a shrink in the economy and it’ll continue until the end of 2023.
Interest rates rose to 1.75% as the Bank battles to stem soaring prices, with inflation now set to hit over 13%. The main reason for high inflation and low growth is soaring energy bills, driven by Russia's invasion of Ukraine. A typical household will be paying almost £300 a month for their energy by October, the Bank warned. High inflation means an increase in the cost of living. You will be able to buy less of some things with the same amount of money as you did before.
The Bank's governor Andrew Bailey told BBC that he had "huge sympathy and huge understanding for those who are struggling most" with the cost of living. "I know that they will feel, 'Well, why have you raised interest rates today, doesn't that make it worse from that perspective in terms of consumption?', I'm afraid my answer to that is, it doesn't because I'm afraid the alternative is even worse in terms of persistent inflation."
Entrepreneurs and experts in the field have told Asian Voice that this recession was long coming and the impact will further hit the cost of living crisis. However, amid this inevitable crisis, there are members of the community who do have some promising arguments and mean to encourage our readers to not lose hope.
Fintech boomed in the last recession
Sharing her two cents on recession, Devie Mohan, Global top 10 fintech influencer, writer, and speaker. Founder Burnmark, Fintech research and data company said, “We have been in recessions and a very slow-growing economy for almost 14 years now. A whole generation has never experienced an economic boom. Recessions always impact service industries the most, and this is definitely something to watch out for in the next five years. Fintech boomed in the last recession, taking customers and retaining customers in a way large banks could not do. They succeeded by innovating quickly and offering a superior customer experience customers hadn't gotten from larger institutions. I think the coming recession will offer more opportunities for fintech to innovate better, offer cost advantages, as well as collaborate better with larger institutions.”
A whole generation has never experienced an economic boom - Devie Mohan, Fintech influencer and entrepreneur
Dr Swati Dhingra, Associate Professor of Economics, Department of Economics at LSE told us, “Any judgement on the cost of living crisis is tied up with what happens in energy markets and that is hard to predict reliably. Even if the crisis proves to be temporary, the UK has a long-standing productivity problem and investment will be key to overcoming it. UK and India are natural economic partners with a shared need for sustainable growth. There are big areas where the partnership can provide benefits to both countries including investments in skills, health and the environment and new areas of governance in the world economy like digital services and international taxation.”
Cash will be king in a recession
Manpreet Singh - CEO of Bobble Digital, based in Leeds said, “The financial impact really depends on whether we have a mild recession or deep recession. The key financial impact will come from other businesses cutting back on costs - in particular - marketing budgets which will impact our agency. Cutting back on marketing budgets really is the opposite of what businesses should do. But, it means that businesses will want to take longer to pay invoices to protect cash flow. Cash will be king in a recession, but few will want to spend it. All this has a knock-on effect on business development, strategy, growth, staffing etc. The only positive is that the upcoming recession is likely to start end of the year or 2023 which means we have time to prepare now for all potential scenarios."
New entrepreneurs worried
Priya Faith, an entrepreneur told the newsweekly, “I launched my luxury Indian jewellery brand, Umara in April. However, with talks of the recession coming, I fear that it will impact our growth as a new luxury brand, and I've noticed sales have been slower in recent weeks. With my freelance work as a writer & marketing strategist, I've experienced several clients needing to streamline, and my workload has been affected significantly. In addition, I believe that in the coming months, many smaller businesses will be forced to cut marketing costs, which as a result, will continue to impact my work.
As a result of my freelance work slowing down, I've had to cut back on what I'm investing into Umara, which has increased my stress levels around money, and the new business significantly. To prepare for a potential recession, I have cut back my monthly outgoings as much as possible. However, I'm left with little disposable income each month despite cutting costs.”
How will the property and mortgage market be affected?
Subhash Thakrar, Vice President and Past Chairman, London Chamber of Commerce explained, “The Bank of England has already given warning shots on the possible recession and raised the interest rates. Technically, there have to be two-quarters of negative growth to call it a recession. We may see further rises as this remains a good tool to reign the inflation rate.
“For those of us who have been in the mortgage market for the last 40 years will know that mortgage rates in the past had reached 16.63% (1981). The last 10 years have enjoyed the lowest rates ever. Consistent high rates are bound to affect the real estate market including the housing sector.
“When rates shot up in the past, there were bankruptcies and repossessions and we may also experience this again. This may apply to those who may have geared up excessively. Luckily, the regulations on lending and the stress tests on rising of mortgage rates conducted by lenders before lending will ensure the damage is cushioned. These will have ensured that there was always a good proportion of equity left and chances of a Loan to Value (LTV) ratio exceeding 100% will be rare. Typically, lending has remained at a maximum of 70%.
“So the impact of the increase in rates will not lead to wide-scale bankruptcies and repossessions. The lenders will also show some flexibility by extending loan terms to ensure people can cope with their finances. This is not a bad thing for banks as they remain secured and earn income for longer periods. During Covid, we experienced this by lenders willing to provide repayment holidays.”
“In some cases, borrowers will be able to switch their loans from repayment to interest only and reduce or maintain their monthly payments.
“An important rule to follow is to ensure that one does not run away from the problem but face it by starting to talk to their lenders and discuss their options. Many people try to avoid meeting lenders. That is a mistake. You will be amazed how cooperative they can be if you open up to them.”
Consistent high rates are bound to affect the real estate market including the housing sector - Subhash Thakrar, Vice President and Past Chairman, London Chamber of Commerce
Pragnesh Modhwadia, Managing Director, Axiom DWFM told Asian Voice, “Despite recent warnings from the Bank of England regarding the future economic climate, it is not all “doom and gloom”, and the UK property market remains resilient. Beyond interest rates and inflation, other unknown variables include income growth, potential tax cuts, the availability of mortgages, consumer confidence – and perhaps the least predictable, wholesale energy costs as impacted by artificially constricted levels of Russian gas exports. Whilst there are areas of real estate that may see a slowdown, such as retail and hospitality, this will create a favourable investment climate for domestic and international investors to secure acquisitions and disposals that would not ordinarily have been available. We are already seeing strong demand for commercial and residential real estate domestically and internationally. In particular, the UK remains an attractive destination for overseas real estate investors and a favourable exchange rate will continue to drive interest. Those who anticipate property price falls next year may yet be surprised by a relatively robust housing market instead.”
The UK property market remains resilient - Pragnesh
Modhwadia, Managing Director, Axiom DWFM
What is the Bank of England doing about high inflation?
In an official note, the bank said, “Putting up interest rates is the main thing we, as the UK’s central bank, can do to bring the rate of inflation down. We’ve been raising Bank Rate since December. Most recently, we put it up on Thursday 4 August to 1.75%. Higher interest rates make borrowing more expensive and they encourage saving. Both of those things reduce how much people spend overall. This helps to push inflation down. But higher interest rates don’t work straight away. They take time to take full effect. So when we use them, we always look at what will happen in the economy over the next few years, not just what’s going on now. We will take whatever actions are necessary to bring inflation down to 2%.”
When will inflation start to fall?
“We expect inflation to start to fall next year. That’s because it’s unlikely that the prices of energy and imported goods will continue to rise as rapidly as they have done recently. And we expect that some of the production difficulties businesses are facing will ease. Less demand for goods and services in the UK should also push down prices. We have a target of 2% for inflation. We expect inflation to be close to that target in around two years,” BoE said in an online statement.
Meanwhile, amid the leadership race, Liz Truss has defended her plans to lower taxes, describing them as the best way to avoid a recession. Sunak on the contrary is said to be focused on tackling inflation before cutting taxes. "Her tax proposals are not going to help very significantly, people like pensioners or those on low incomes who are exactly the kind of families that are going to need help", said Mr Sunak. He said he wants to ensure "that the people who really need our help do get the support that they need to get through the winter".