UK economy avoids decline but cost of living pains many

Feb 10, 2023, 12:15 AM | Updated: Feb 12, 2023, 6:34 am

Amanuel Woldesus, who runs the Margins Project stands in the Union Chapel in London, Thursday, Feb....

Amanuel Woldesus, who runs the Margins Project stands in the Union Chapel in London, Thursday, Feb. 9, 2023. The small notice pinned to a wall at Union Chapel in north London is a sign of despair for charity workers dealing with the fallout from Britain’s cost-of-living crisis. The showers, it says, are reserved for the homeless. Woldesus, who runs the Margins Project charity based at the church for people in crisis, is frustrated that he's being forced to ration a service this way. (AP Photo/Kin Cheung)

(AP Photo/Kin Cheung)

LONDON (AP) — The small notice pinned to a wall at Union Chapel in north London is a sign of despair for charity workers dealing with the fallout from Britain’s cost-of-living crisis.

The showers, it says, are reserved for the homeless. In other words, those who still have a roof over their heads but can’t afford to heat water for bathing are in essence asked to refrain.

Amanuel Woldesus, who runs the Margins Project charity based at the church for people in crisis, is frustrated that he’s being forced to ration a service this way.

“We are the sixth-richest country in the world, and who is making these decisions? Me! Not the government,” he said with a mixture of anger and incredulity. “It’s just completely wrong.”

The pressures are likely to get worse as Britain faces a prolonged economic slowdown triggered by soaring food and energy prices and compounded by tax increases and higher interest rates that authorities have unleashed as they battle the crisis.

That gloomy outlook was underscored Friday when the Office for National Statistics said the British economy stagnated in the final three months of last year. Monthly estimates suggest that economic activity slowed further at the end of the year, with gross domestic product shrinking 0.5% in December.

While Britain avoided a second consecutive quarter of declining economic output — one definition of a recession — the data offered little relief for hard-pressed families and businesses. The rising cost of living has driven months of strikes by nurses, ambulance workers, train drivers and other public-sector employees seeking higher pay.

Middle-class families will see their disposable incomes fall by as much as 13%, or 4,000 pounds ($4,840), over the next financial year, according to analysis by the National Institute for Economic and Social Research. About 25% of households won’t be able to pay their food and energy bills out of their take-home income, up from 20% last year, the independent think tank estimates.

“The U.K. will likely avoid a protracted recession in 2023, but GDP growth is set to remain close to zero,” the institute said. “However, with the cost-of-living crisis having a lasting effect on households, for at least 7 million it will certainly feel like a recession.”

For people across the U.K., that means turning down the heat and skipping showers to save money on gas and electricity bills after energy prices soared following Russia’s invasion of Ukraine.

It also means constantly hunting for bargains or resorting to food banks after food prices jumped 16.9% last year.

Carlton Peters, 57, a chef for the Margins Project’s twice-a-week free lunch program, said he now buys all of his own food in the reduced-price section of the supermarket and has cut out butter because it is too expensive.

The government isn’t doing enough to address the crisis because politicians don’t understand what average people are going through, Peters said.

“They don’t know what it’s like to live with your fixed income and you have to spend it and shuffle it around with all your bits and pieces,” he said. “And when something goes up, they don’t complain. We complain. We say the price of milk has gone up by 20% and eggs 40%. That can’t be right.”

The government says its policies, including a cap on gas and electricity prices that is designed to limit average household energy bills to 2,500 pounds ($3,027) a year, have reduced the severity of Britain’s economic downturn.

While a recession is often defined as an extended period of economic decline, experts disagree on exactly how to determine when a recession begins.

The U.S. and European Union have independent bodies that look at a wide range of indicators, including unemployment, consumer and business spending, before deciding whether their economies are in recession. Britain does not.

That left commentators anxiously awaiting the fourth-quarter report to see whether Britain had met the technical definition of a recession, often described as two consecutive quarters of declining output. The U.K. economy shrank by 0.2% in the third quarter.

On Friday, Treasury chief Jeremy Hunt focused on the fact that GDP expanded 4% for all of 2022, more than any other Group of Seven advanced economy. But that growth occurred in the early part of the year, before inflation spiked.

“The fact that the U.K. was the fastest-growing economy in the G-7 last year, as well as avoiding a recession, shows our economy is more resilient than many people feared,” he said. “However, we are not out the woods yet, particularly when it comes to inflation.”

Regardless of the technicalities, the global economic slowdown is hitting Britain harder than other major economies.

Inflation in the U.K. remains at levels last seen in the early 1980s. Consumer prices rose 10.5% in December from a year earlier after peaking at 11.1% in October. By contrast, U.S. inflation slowed to 6.5% in December.

Britain also is facing a drop in trade with the European Union as a result of its departure from the bloc and increasing taxes for consumers and businesses as the government tries to balance the budget and reduce debt.

More troubling for economic forecasters is an increase in the number of people aged 50 to 65 who are leaving the workforce prematurely, reducing productivity.

All of that is reducing consumer spending and business investment.

Britain’s economy is likely to shrink 0.6% this year, the only advanced nation expected to decline, the International Monetary Fund said last month.

The Bank of England expects the slowdown to last throughout 2024, even though it says the recession will be shallower than previously forecast. The central bank has raised interest rates 10 times since December 2021 in an effort to slow inflation.

At Union Chapel, it pains Woldesus to watch the struggle of families unfold before him every day. The free meals he serves on Mondays and Wednesdays may be the only real food his guests get each week.

“The situation is so dire,” he said. “I can see it moving in front of me.”

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UK economy avoids decline but cost of living pains many