Economy predicted to avoid recession in 2023

18th October 2023

The UK should still avoid a recession, although GDP growth is set to remain sluggish for the remainder of 2023 and into 2024 amid headwinds from high interest rates and a weaker-than-anticipated labour market, according to the EY ITEM Club’s new Autumn Forecast.

Following a better-than-expected start to the year, GDP growth expectations for 2023 have been upgraded slightly from 0.4% in July’s Summer Forecast to 0.6%. Meanwhile, the EY ITEM Club’s 2024 GDP growth forecast has been nudged down from 0.8% to 0.7% thanks to the lagged effects of the recent interest rate rising cycle. A likely end to rate increases at the Monetary Policy Committee’s (MPC) last meeting, combined with falling inflation and a return to real pay growth, should keep the economy from falling into recession.

Inflation is now expected to fall slightly faster than was forecast in the summer, and could reach 4.5% by the end of 2023, before hitting the Bank of England’s 2% target during the second half of 2024. In July, the EY ITEM Club expected inflation to end 2023 at just under 5%. Bank Rate is not expected to increase beyond its current level of 5.25%, and the EY ITEM Club says the MPC may start to cut Bank Rate from May 2024.

The economy is still forecast to grow 1.7% in 2025 as lower inflation lifts real incomes and interest rates are cut.

Hywel Ball, EY UK Chair, said “The cost of debt is set to be the biggest headwind for the UK economy over the next 12 months, with consequences for both businesses and consumers. But while high interest rates will weigh heavily on growth, there are still signs of resilience from which we can take positives. Inflation is heading in the right direction, average wages are rising in real terms once more, and household and corporate balance sheets remain unusually healthy.”

“While the UK may have lagged some of its global peers in its economic recovery from the pandemic – despite upwards revisions to GDP data – this suggests there is room for catch-up growth. Most encouragingly, the recent strength of business investment, which had been disappointingly subdued for some time, perhaps signals that the economy’s growth potential may be reviving. There’s no getting away from the fact that growth will be limited in the short-term, but there are reasons for optimism for next year and beyond.”

The EY ITEM Club notes that business investment grew significantly in the first half of 2023, but that high interest rates and a low-growth economy mean the recent pace of investment growth is unlikely to be sustained. Nonetheless, given the strength of the improvement at the start of the year, the EY ITEM Club has upgraded its 2023 business investment growth forecast to 5.9% from the 1.4% growth expected in the Summer Forecast. This would be the fastest rate of growth since 2016, excluding the post-pandemic bounce back seen in 2022.

The EY ITEM Club adds that, despite higher interest rates, deleveraging by UK companies and relatively limited refinancing needs for market-based debt suggests that, on the whole, UK companies won’t face serious financial stress. The EY ITEM Club expects a modest fallback in investment in 2024, with a contraction of around 0.5%.