Business Maverick

Business Maverick

UK forecasters see stronger growth and less risk of recession

UK forecasters see stronger growth and less risk of recession
A pedestrian crosses the street outside the Bank of England in London, Britain, 23 January 2023. (Photo: EPA-EFE / TOLGA AKMEN)

UK economic forecasters are stepping away from their recession predictions after falling energy prices and stronger-than-expected spending helped to support growth in the first half of 2023.

Britain’s two biggest business lobby groups both are anticipating the economy will expand slightly this year, dodging two consecutive quarters of decline that they had previously expected. A Bloomberg survey of UK economists also shows the consensus for growth strengthening.  

The forecasts published on Monday mark a sharp break with a minority of forecasters, who say that inflation and the threat of higher interest rates is likely to curtail both spending and confidence and bring about a downturn later in the year. Those gloomy voices have been increasingly silenced by surprisingly strong economic data suggesting that the UK so far is holding up better than most had expected last year.

“Businesses and consumers alike will be relieved that the UK economy has avoided recession and will re-enter growth territory in the second half of this year,” said Rain Newton-Smith, who was appointed as the CBI’s new director general earlier this year following misconduct allegations against other directors.

Business leaders are concerned that the growth outlook — while positive — isn’t strong enough to persuade businesses to invest in skills and productivity needed to maintain the pandemic recovery. They’re telling the government that a lack of staff available to fill vacancies is limiting the UK’s growth potential.

Nevertheless, the Confederation of British Industry said it is now forecasting gross domestic product growth of 0.4% over 2023. It sees a 1.8% expansion in 2024. Those figures are up from previous predictions for a 0.4% contraction this year and 1.6% growth next.

A Bloomberg survey of UK economists also showed optimism for growth edged up marginally in the last month. The consensus forecast is for GDP to rise 0.2% this year and 0.9% next year — both 10 basis points higher than the previous survey. 

The British Chambers of Commerce also updated its forecasts last week, saying the UK would avoid a recession with growth of 0.3% this year instead of its earlier estimate for a contraction of that size.

While most economists are cautiously optimistic, other commentators are still downbeat about the outlook for the UK.

Former US Treasury Secretary Larry Summers said earlier this month that he would be “very surprised” if the UK got through the next two years without a recession, and JPMorgan Asset Management’s chief EMEA market strategist Karen Ward said a recession was still likely because the UK is in a “tough spot”.

The Bank of England in its latest monetary policy report said the UK should avoid a recession — a reversal of its position last November when it forecast the longest period of contraction in modern history. Investors expect the central bank to raise interest rates over the summer to curb persistent inflation.

Markets have pencilled in rates to hit almost 5.5% by the end of the year, a full point above the current level. The BOE has previously flagged 5% as the threshold at which rates will become painful to consumers.

“There appears to be growing confidence that the UK will avoid a recession this year,” said Dan Hanson, senior UK economist at Bloomberg Economics. While this is similar to his central forecast, Hanson said he had “become less confident in that view over the past month thanks to the significant rise in BOE rate expectations. If the repricing sticks, it could be enough to tip the economy into a recession in the second half of the year.”

Even if the UK does avoid a recession, the economic environment may still be tough for many businesses and households. 

“As the BOE continues to push rates higher, we no longer expect a swifter recovery next year,” said Deutsche Bank’s Sanjay Raja in his response to Bloomberg’s survey. “Our base case is for sluggish growth.” DM

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