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The UK economy is now expected to avoid both a technical recession and a calendar year contraction in 2023, according to the EY ITEM Club Spring Forecast. The economy is expected to record 0.2% growth this year, which is a significant upgrade from the -0.7% contraction predicted in January’s Winter Forecast. The improved outlook is largely thanks to better-than-expected GDP in Q4 2022 and the expected rapid easing of inflationary pressures.
The economy’s resilient performance also means the UK is likely to avoid the two consecutive quarters of contraction that would qualify for a technical recession.
With inflation likely to recede at pace, the Bank of England expected to begin cutting interest rates at the turn of 2023 and 2024, cheaper energy, and new investment incentives kicking in, 1.9% growth is still forecast for 2024. Growth is expected to reach 2.3% in 2025 (up from 2.2% in the Winter Forecast).
The economy is expected to flatline in the first half of 2023 as a result of the impact of still-high inflation and rising interest rates, the extra Bank Holiday in May, and a poor launchpad for growth from December’s fall in GDP. The outlook is set to improve from the summer onwards as the fall in wholesale energy prices helps push down inflation – faster than the EY ITEM Club expected in January – and eases the squeeze on households, while the fiscal loosening from the Spring Budget should start to take effect.
Hywel Ball, EY’s UK Chair, said “The UK economy seems to be turning a corner, albeit very slowly. Economic performance has been resilient, despite challenges in the latter half of 2022, but the significance of the upgraded outlook shouldn’t be overblown. While easing, the economy’s challenges haven’t gone away overnight: inflation is still in double-digits and energy prices remain historically high.”
“However, perceptions matter and the fact the economy has been able to outperform expectations could help stir a revival in business and consumer confidence. Of course, there is still room for economic surprises, but the balance of risks has become a little more favourable than the last forecast. And while subdued growth this year is far from ideal, falling energy prices and inflation, an end to rises in borrowing costs, and growing confidence, mean the economy has a chance to shed some of the gloom it has accumulated recently.”
According to the EY ITEM Club, key downside risks to this forecast include a renewed increase in wholesale energy prices and the potential for tighter lending criteria in the wake of disruption in the global banking sector and rising central bank interest rates. On the other hand, an upside risk is the possibility that inflation may fall faster than expected, which could stoke more significant growth in the short term and see interest rates cut sooner.