LONDON (BLOOMBERG) – The British economy is already in recession as the cost of living crisis has devastating consequences for household incomes, a leading think-tank has concluded.

In a gloomy assessment, the National Institute of Economic and Social Research (NIESR) found that average real disposable incomes will fall by an unprecedented 2.5 per cent this year and remain 7 per cent below their pre-Covid-19 level through 2026.

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

It also estimated the number of households living from paycheque to paycheque will almost double to seven million by 2024, including 5.3 million with no savings at all.

They will be forced to go into debt or arrears as soaring energy bills eat into incomes, the group said.

The warning of a recession, which NIESR said started this quarter and will continue until early 2023, is a stark reminder of the challenges facing the two contenders vying to replace Mr Boris Johnson as prime minister.

The economists said the depth of the crisis will force the government to respond, suggesting a defined objective is required instead of the financial management approach of the past.

It also flagged calculations showing the economic gap between London and the rest of Britain is widening. That suggests the government’s flagship policy of “levelling up” less wealthy areas is falling short.

The think-tank suggested the most vulnerable in Britain need further help in the face of consumer price inflation that it said will rise to almost 11 per cent this year.

Retail price inflation, meanwhile – a broader measure used to set increases in train fares and government interest costs, will hit 17.7 per cent, the highest since 1980,

In response, it sees the Bank of England hiking interest rates to 3 per cent next year.

Unemployment will rise above 5 per cent as demand falls, according to the projections.

“It’s now up to the Monetary Policy Committee to make sure inflation does come down next year and the new chancellor to support those households most affected by the recession and cost-of-living squeeze,” Mr Millard said.