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A recession is still on the cards in the UK despite the economy performing much better than experts predicted just a few months ago, new forecasts out today project.
Higher interest rates and households responding to the cost of living crunch gripping their finances by trimming spending is tipped to push GDP 0.3 per cent lower this year, according to consultancy KPMG.
Families are being hit by the worst inflation surge in four decades and the Bank of England jacking up borrowing costs to tame it.
Bank Governor Andrew Bailey and his team of economists bumped rates up for the eleventh time in a row last week to 4.25 per cent, a post-financial crisis high, as he stepped up the central bank’s fight against inflation, which rose to 10.4 per cent last month.
KPMG reckons the Bank will keep rates at that level for the whole of this year, weighing on household and business spending.
As a result, “although the likelihood of a UK recession has fallen, it has not dissipated entirely,” the firm said in its latest set of UK and global economic forecasts.
A batch of economists have junked their recession warnings recently in response to firms and families holding up better than feared under the cost of living crisis.
The Office for Budget Responsibility (OBR), Britain’s official forecaster, at Jeremy Hunt’s first budget earlier this month raised its GDP forecasts for this year on the basis that households will raid their savings to maintain spending.
Bank of England officials also scrapped their recession warning at last week’s rate decision. Back in November, they had projected the UK was on course for the longest recession in a century.
Despite the rosier outlook, OBR chief Richard Hughes warned yesterday on the BBC’s Sunday with Laura Kuenssberg programme that families are grappling with the biggest hit to their living standards since records began.
KPMG boffins said a slowdown in the housing market caused by higher mortgage rates freezing potential buyers out of a home purchase would clamp down on economic growth.
“Higher costs of borrowing and slowing growth outlook are expected to lead to weakening business investment during the course of this year,” they added.
The UK is tipped to be the only G7 country to undergo an economic contraction this year. Growth is also poised to flatline next year, with GDP set to move just 0.6 per cent higher.
A sharp decline in inflation to just over the Bank’s two per cent target by the end of this year could open the door for Bailey and co to alleviate pressure on households and businesses by slashing borrowing costs in 2024.
Slowing growth and lower inflation presents the “Bank of England with an opportunity for a series of gradual rate cuts next year, bringing the base rate to 3.5 per cent by the end of 2024,” the forecasts said.
Global output will expand 2.1 per cent in 2023, KPMG said, and accelerate to 2.4 per cent in 2024.
India is projected to have the strongest growth of any country monitored by the consultancy, hitting 6.4 per cent and 6.9 per cent this year and next respectively.
