Since the full effects of the previous surge in energy prices and the hike in interest rates have yet to be felt, we still think the economy will succumb to a recession this year. Admittedly, pandemic savings and the government’s handouts appear to have prevented the recession from starting last year. And the fall in wholesale energy prices since the middle of December has lowered import prices, triggered a partial rebound in the UK’s terms of trade (the ratio of export prices to import prices) and reduced the size of the decline in national income that the government, households and businesses need to absorb. Even so, as it usually takes 12 months for the economy to fully respond to a deterioration in the terms of trade, real GDP growth is much more likely to weaken before it strengthens. And with only a third of the drag on real activity from higher interest rates having been felt so far, a recession still feels inevitable.
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