A report has warned the UK is set to enter a recession which will hit millions of the most vulnerable households up and down the UK.  

Gross domestic product is predicted to shrink in the third and fourth quarters of the year, and in the first of next year.

The report, from the National Institute of Economic and Social Research (NIESR), warned of a “three-quarter technical recession, but a relatively shallow one”.

However, it also said there is an “increased possibility of a deeper recession”.

It also said the threat of stagflation, a nightmare of economists, has returned for the first time since the 1970s.

What is stagflation?

Stagflation is when an economy sees slow growth, high unemployment and rising prices.

A mash-up of “stagnation” and “inflation”, it means the economy is not working properly. Prices will continue to increase while economic growth decreases.

This lack of economic growth then leads to higher unemployment.

Impartial Reporter: Recession could hit the UK (PA)Recession could hit the UK (PA) (Image: Newsquest)

The economy is likely to grow this year, the NIESR said, but only by 3.5%, and then down to 0.5% next year – far from an emphatic bounce back from the pandemic.

The rising cost of living will be affecting 2.5 million households, seeing people use their savings to afford to live.

This means that by 2024, one in five UK households will have no savings.

The institute also says the number of households living pay cheque to pay cheque will nearly double from 3.9 million to 6.8 million – or 25% – in 2024.

The report also found that inflation will peak around the last three months of this year.

The report found that inflation will peak around the last three months of this year.

Consumer price index inflation will reach close to 11% but will fall back to 3% by the end of 2023.

Professor Stephen Millard, NIESR deputy director for macroeconomics, said:  “The UK economy is heading into a period of stagflation with high inflation and a recession hitting the economy simultaneously.”

He called on the Bank of England to try to get inflation under control – interest rates of 3% will probably be necessary for that – and for the new chancellor to support households hit by the recession and cost-of-living squeeze.

The report called on the Government to increase Universal Credit payments by £25 a week for at least six months from October.

This would cost around £1.4 billion. It also called for the energy bill relief payments to increase from £400 to £600 for 11 million low-income households, costing £2.2 billion.

The research reveals that between the impact of inflation and the Government’s refusal to raise benefits in line with inflation rates, the 10% poorest households will now be 5% worse off.

This is despite the support promised for energy bills.

It makes them the worst hit of any income group in society.

“All households are facing soaring energy and food bills but too many have to resort to credit, build up payment arrears or see their savings wiped out,” said Professor Adrian Pabst, deputy director for public policy at NIESR.

“The incoming administration needs to provide immediate emergency support to the 1.2 million hardest hit households and the one in five households that will become financially vulnerable as the energy price cap is lifted and the recession begins to bite.”

The report forecast that real incomes will be permanently lower, dropping 2.5% in 2022 alone.

Real incomes will be 7% below where they were headed before Covid by 2026, it said. Around 3% to 5% of this hit will come from Brexit, 1% to 3% from energy price rises and the remainder from Government policy.