The British Chambers of Commerce (BCC) expects the UK economy to avoid a technical recession but shrink by 0.3% in 2023, before returning to growth in 2024; inflation will slow to 5% by Q4 2023.
UK Economic Outlook
The British Chambers of Commerce (BCC) forecasts the economy will not return to its pre-pandemic size until the final quarter of 2024.
The rate of UK inflation is expected to continue slowing throughout 2023, hitting 5% by Q4.
The economy will shrink in 2023, by much less than previously expected, but the recovery will remain weak with predicted growth for 2024 revised down.
GDP to shrink in 2023
In the immediate term, the BCC is now expecting the first quarter of 2023 to see GDP fall, before three quarters of flat or weak growth – leading to an overall contraction of 0.3% for the year. This is a slightly more optimistic outlook than either the OBR or Bank of England’s predictions. The BCC also expects the economy to grow in 2024, at 0.6%, compared to the BoE’s forecast of 0.25% shrinkage.
The expectation for 2023 has been revised upwards from -1.3% in the BCC’s last forecast, due to a more resilient economic performance at the end of 2022. Household spending held up well, despite a fall in real disposable income due to rising energy costs, inflation outstripping wages, frozen income tax allowances and higher mortgage payments.
Exports were also stronger than expected in the second half of 2022, in part due to fuel and machinery demand, and also trade in precious metals – likely seen as a safe harbour in uncertain times. However, this trend is not expected to continue with a 4.5% decline in exports predicted across 2023. BCC research also shows that while overall export values have held up, many smaller companies are not reporting any improvements in their trading conditions.
Despite a big drop in business confidence in Q3 2022, this now appears to have stabilised albeit at a lower level. Business investment has now returned to pre-pandemic levels, although it was not performing well then. With an expected rise in corporation tax coming down the tracks, alongside a business rates revaluation in April, and higher interest rates, this is likely to lead to flatlining investment in 2023 at 0.2%.
Inflation likely to continue slowing
Businesses and consumers will continue to face high costs due to inflation. But the current downward trajectory, following a peak of 11.1% in October 2022, is likely to continue throughout the year, ending at 5% in Q4. The CPI rate is expected to continue to slow and drop below the Bank of England’s target to 1.5% in Q4 2024. It is then expected to rise again in 2025, returning to the 2% goal. This means prices will continue to rise, at slower rates, and that they will stabilise at a much higher level than two years ago. Average earnings growth will lag behind inflation until 2024.
The forecast for the Bank of England’s interest rate has moderated following the big uptick after the mini-budget of September 2022. The rate is now expected to end 2023 at 4.25%, just a quarter of a percentage point higher than the current rate. It should then fall to 3.25% by Q4 of 2025, though this is still much higher than the historically low rates, below 1.0%, seen for more than a decade.
Investment and recovery expected to be weak
Overall investment is expected to contract by 1.5% in 2023, but business investment will make a positive contribution of 0.2%. Household consumption is also expected to fall by 0.4% and Government spending is expected to increase by 1.8%.
The overall picture for 2024 shows a return to growth but only at a level which will see the UK economy finally get back to its pre-pandemic size (Q4 2019) in the final quarter. Net exports, household spending and business investment will all return to weak positive territory, but with the contribution of government spending falling, the recovery will be lacking in strength.
Commenting on the forecast, Alex Veitch, Director of Policy at the British Chambers of Commerce, said:
“Although the economy should now avoid a technical recession, the stark reality is that businesses face a very difficult year ahead. With the Government having little fiscal headroom for the Spring Budget, it is vital it spends the money it has got wisely.
“Businesses tell us they are most concerned about the difficulties in recruiting staff, paying their energy bills and rising taxes.
“We know we have a tough year ahead and there is currently little incentive for firms to risk ploughing their dwindling cash reserves or fresh loans into new projects.
“But unless we unlock investment into growth areas of our economy, then the UK will get left behind by our competitors.
“The Chancellor must show more faith in the ability and talent of our businesses. If he backs them, by acting on childcare to ease staff shortages and helping them manage their energy costs, then the UK economy could still prosper.”
Key points in the forecast:
- UK GDP growth forecast for 2023 is -0.3%, 0.6% in 2024 and 0.9% in 2025
- Following no growth in Q4 2022, quarter-on-quarter GDP growth is forecast to decline in Q1 2023 by 0.3%, before flatlining again at 0.0% in Q2, followed by 0.2% in Q3 and Q4
- Household consumption forecast is for a contraction of 0.4% in 2023, before growing again to 0.7% in 2024, and 1.2% in 2025
- Business investment forecast is to grow by 0.2% in 2023 followed by 1.0% in 2024, and then 1.7% in 2025
- BCC expects exports to shrink by5% in 2023, before growing by 1.1% in 2024 and 2.4% in 2025, compared to import growth of -2.0%, 1.4% and 2.0%
- BCC expects the UK unemployment rate to rise to 4.5% in 2023, then 4.8% in 2024 and then dipping to 4.1% in 2025
- CPI inflation has now peaked and should slow to 5% in Q4 2023. It is expected to further reduce to 1.5% in Q4 2024, before rising slightly to 2.0% in Q4 2025.
- UK official interest rates are expected to rise to 4.25% by Q4 2023 and then to 3.5% in Q4 2024, ending 2025 at 3.25%.