Shoppers are tightening their belts. As prices rise faster than pay packets, families are consciously cutting back.
With grocers’ sales in May having fallen to their lowest in more than four years, supermarkets are starting to feel the pinch: the pandemic-induced boom in food sales is at an end.
It isn’t just grocers. Families spent heavily on household goods through the pandemic, revamping homes when they were unable to spend on travelling or going out. But even these shops' sales have dropped, to the lowest level since the lockdown of January 2021.
Though petrol stations have recovered from the lockdowns, as prices hit multiple record highs, sales volumes are still not back up to pre-pandemic levels.
This is the sharp end of the cost of living crisis, and it is set to force the nation into recession. Hopes of a “Roaring Twenties” rebound from the economic havoc of Covid are disintegrating on price rises imposed by disrupted supply chains, big-spending governments and Russia’s war in Ukraine.
The retail sales figures indicate the crunch is biting more quickly than economists had anticipated: Britain is already tumbling into recession as warning signs flash red.
Bank of England forecasts last month warned the economy would go into reverse from October when energy prices rise by another 40pc, before recovering slowly, leaving GDP lower in much of 2023 than in 2022.
This month, however, officials acknowledged that, as GDP had already fallen in March and April, the economy would contract in the second quarter of the year as well. The usual definition of a recession is two consecutive quarters of shrinking GDP.
The Bank’s figures raise the underwhelming hope that a “technical” recession could be dodged if GDP falls in the second quarter, rises in the third, and falls again in the fourth.
So much for straw-clutching. Economists are increasingly convinced the nation is on the brink.
“The risks of a UK recession are mounting,” says Philip Shaw at Investec, pointing to the pressure of higher borrowing costs.
“We expect the economy to struggle under the weight of higher interest rates and to enter a short recessionary period at the end of the year, extending into the first quarter of 2023.”
Martin Beck, chief economic adviser to the EY Item Club, says “the retail sector is already effectively in recession” with the damage spreading as inflation combines with slumping household confidence to cause a “marked slowdown” in other consumer industries.
Kallum Pickering at Berenberg Bank says the contraction so far has largely been caused by the end of government spending on Covid schemes such as test and trace, but the consumer squeeze is taking over as the driver of the downturn.
“The UK seems to be in the early stage of a recession,” he says, predicting a peak-to-trough fall in GDP of around 2.5pc, with the downturn lasting until mid-2023.
This is about half the size of a “usual cyclical recession” as in this case Britain was not in any sense due a recession, but is instead “a fundamentally healthy economy that has been overwhelmed by various issues, mostly external.”
Nor is this a recession of the type we have become accustomed to in the past decade or so — a giant global crisis.
The pandemic caused the biggest downturn in centuries, forced on the nation by a need to cease normal human interactions.
The financial crisis was an international crunch in financial markets with risky lending coming home to roost, which took years to overcome.
This time around, there are some similarities with “traditional” recessions caused by a recovery overheating, interest rates rising and output temporarily falling. But that usually comes at the end of a full multi-year business cycle, like the Lawson boom-and-bust in the late 1980s and early 1990s, not so soon after a giant global crunch.
While demand in the US has boomed on the back of monster spending programmes, the UK’s recovery has been rather more tame.
An alternative comparison is the energy price shocks of the 1970s, when OPEC’s oil embargo forced up costs in the west, sending inflation soaring and causing multiple downturns.
Industrial strife adds to the perception that the winter of discontent could be on the way when energy bills go up again.
Pickering argues this recession is “unique” as banks are stronger than they were in the financial crisis, households are in a better financial position, unemployment is low and central banks have realised they need to act to stop inflation becoming embedded.
“To some extent, these are 1970s-style problems. The difference today, however, is that we do not need to wait a decade to realise what the solution is,” he says.
Central banks are raising interest rates with the aim of stopping inflation becoming embedded, while governments are supporting the search for alternative energy sources to wean ourselves off fossil fuels from dictators.
That does not mean the next year will be pain-free - far from it - but it need not be another 1970s.