The UK is heading for a recession, Lord Hammond warned, saying “all the data points to this”.
The former chancellor told Sky News that the country is facing a “very, very difficult period in the short term”.
He said he believes the UK economy will slow down sharply in the autumn.
Lord Hammond said it was “the next part of the cycle that started with the COVID pandemic” when a “huge government response” was given.
“To think that somehow we can get past that, leave the tab on the table and act like nothing happened is unrealistic, it’s naive,” he said.
“There must now be a part of the cycle where we correct the extraordinary action that was taken during the pandemic.
“And much of what we are currently seeing in terms of inflationary pressures on the domestic economy is the result of the fact that people have saved a lot during the confinement period and that this savings has been released to the economy over the last six years. months. .”
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2:49 The UK economy contracted by 0.3% in April
He said that while the war in Ukraine was one of the engines of inflation, the problem began long before the conflict, fueled by COVID stimulus packages provided by the UK, US and other countries.
He said Brexit has also had an impact on rising prices because it has led to changes in supply chains.
“As we emerge from the COVID crisis, supply and demand are safe,” he said.
He said there are many parts of the economy that are “not yet functioning normally again”, so “there will have to be an effect”.
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1:34 CBI chief: The government can prevent the recession
Asked if the government should increase spending or reduce taxes, he said people were “looking for instant, painless solutions.”
“During the period of the COVID crisis, they were invited to believe that the government could always offer instant and painless solutions,” he said.
“But you can’t solve an inflation problem by injecting more liquidity into the economy, that is, pouring fuel into the fire.
“And unfortunately, the problem we are facing right now is not the short-term pain of 10% inflation. We have to live with that.
“The question is whether we can now manage inflation down for the next year or so, to get back to normal.”
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He said the government “cannot compensate people for all the inflationary pressure” because short-term relief would lead to long-term inflation.
Lord Hammond said an economic slowdown in the autumn is “probably a good thing”.
He said he knows “people won’t see it that way”, but by “squeezing the simulation before it gets incorporated, we have a real chance of recovering next year in much better shape”.
He expressed support for the Bank of England’s decision to raise interest rates in recent months.