The BCC expects the UK economy to remain in recession for five quarters before an anaemic recovery in 2024, but inflation has likely peaked at 11%.
UK Economic Outlook
- The British Chambers of Commerce (BCC) forecasts the economy will not return to growth until Q4 2023.
- UK inflation is expected to be 11.0% in Q4 2022 and to slow to 5% by Q4 2023
- The economy will grow in 2024 but the recovery will be weak as business investment, exports and household consumption all remain subdued
GDP heading for a five-quarter contraction
In the immediate term, the BCC is now forecasting a five-quarter recession for the UK economy which began in Q3 of 2022. The annual expectation for GDP growth in 2023 is now -1.3%, broadly in line with the OBR and Bank of England’s predictions. However, unlike the Bank of England, the BCC expects the economy to grow in 2024, albeit at 0.7%, which is around half of the OBR’s forecast.
A key contributor to the 2023 economic contraction is a sharp fall in household spending as consumers face rising energy costs, falling real wages, frozen income tax allowances and higher mortgage payments. A poor outlook for the global economy means exports are also likely to fall, although they will be outstripped by a sharper decline in imports.
The mini-budget in September 2022 is expected to have had a long-term impact on borrowing costs for both businesses and consumers. Alongside the effect of changes in corporation tax and business rates on already dwindling business confidence, this is likely to lead to a 3.0% contraction in firms’ investment in 2023.
Inflation likely to have peaked at 11%
Businesses and consumers will continue to face high costs due to inflation, but the upward spiral is now thought to have peaked for Q4 2022. This is down from the previous BCC prediction of 14.0%, thanks in part to the Government’s energy price guarantee. The CPI rate is expected to slow to 5.0% in Q4 2023 and finally drop below the Bank of England’s target to 1.5% in Q4 2024. However, this simply means prices will stabilise at a very high level and Government plans to reduce energy support after April 2023 could put upward pressure on inflation again.
The forecast for the Bank of England’s interest rate has changed dramatically following the mini-budget of September 2022; the rate is now expected to increase to 5.25% by Q4 of 2023. Although the impact of energy and raw material costs on inflation is likely to reduce in 2023, there remains a likelihood of upward wage pressure as workers seek to increase their income.
Investment and recovery expected to be anaemic
Overall investment is expected to fall by 1.8% in 2023, with business investment expected to fall even further by 3.0% in 2023, down significantly from a previous prediction of a 0.6% increase. This follows recent BCC research showing significant falls in business confidence in recent months. Household consumption is also expected to fall by 2.3% although Government spending is expected to increase by 4.6%.
The overall picture for 2024 shows a return to growth but not at a level which will compensate for the five quarters of a shrinking economy. Net exports, household spending and business investment will all return to positive growth but with government spending dropping, the recovery will by lacking in strength.
Commenting on the forecast, Alex Veitch, Director of Policy at the British Chambers of Commerce, said:
“BCC research has shown that business confidence has been falling for months. It is now clear that the September mini-budget and Autumn Statement have had a further chilling effect.
“Very few firms will be willing to invest as they face into a wall of higher prices, interest rates and taxes.
“The very real worry is that the UK will get left behind by our competitors, once the economy emerges from recession, as growth remains so weak.
“But it is not too late to turn this around. With concrete action on infrastructure investment, skills, trade, and green tech we can put the economy in a much stronger position.
“The next Budget, due in March 2023 will be a real acid test of whether the Government fully understands the scale of the problems ahead and is prepared to act.
“In the meantime, the forthcoming announcement on energy bill support for businesses will be watched closely by firms for signs that the Government grasps the size of the challenges they face.”
Key points in the forecast:
- UK GDP growth forecast for 2022 is 4.2%, -1.3% in 2023 and 0.7% in 2024
- Following a contraction of growth in Q3 2022 by 0.2%, quarter-on-quarter GDP growth is forecast to continue to decline in Q4 by 0.9%, 0.3% in Q1 2023, 0.4% in Q2, and 0.2% in Q3, before a slight increase in growth of 0.1% in Q4 2023.
- Household consumption forecast is for growth of 4.7% in 2022, before shrinking by 2.3% in 2023, and growing 0.3% in 2024.
- Business investment forecast is to grow by 4.2% in 2022 before a 3% contraction in 2023, and then an increase of 1.4% in 2024
- BCC expects export growth of 7.3% in 2022, -2.7% in 2023 and 0.4% in 2024, compared to import growth of 11.2%, -6.6% and 0%
- BCC expects UK unemployment rate of 3.7% in 2022, before rising to 4.5% in 2023 and reaching 5.1% in 2024
- CPI inflation is forecast to peak at 11% in Q4 2022, before slowing to 5% in Q4 2023. Inflation is expected to further slow to 1.5%, below the Bank of England’s 2% target, by Q4 2024
- UK official interest rates are expected to rise to 3% by Q4 2022 and then to 5.25% in Q4 2023, ending 2024 at 4.5%.