The British Chambers of Commerce (BCC) marginally upgrades its 2023 GDP forecast to 0.4%, but economic activity will remain very weak throughout 2024 and 2025, according to the organisation’s latest Quarterly Economic Forecast.
UK Economic Outlook
The UK economy remains on course to avoid a technical recession, but growth is likely to remain so feeble that it will be hard to spot the difference. A growth rate of 0.4% is expected for the whole of 2023, dropping to 0.3% in 2024, and nudging up only slightly to 0.7% in 2025. Consistently low economic growth of this nature is comparable to previous periods of economic shocks and recessions such as the oil crises of the 1970s and financial crash of 2008.
Core inflation is proving sticky. But while BCC research shows inflation is the top concern for UK firms, fewer businesses now expect their prices to rise over the coming months. The forecast for the CPI rate, therefore, remains unchanged at 5.0% in Q4 2023.
However, CPI is now forecast to take longer to return to the Bank of England’s 2% target – only reaching this goal in the last quarter of 2025.
Slight upwards revision to GDP
While the first ONS estimate of GDP growth for Q2 2023 was better than expected, the BCC forecast expects the next two quarters to flatline – leading to overall growth of 0.4% for the year. This is in line with the Bank of England’s forecast.
However, with interest rates now predicted to remain higher for longer, the BCC expects the economy to grow by just 0.3% in 2024 and 0.7% in 2025.
This downward revision for the next two years, from the BCC’s previous Q2 forecast of 0.6% and 1% respectively, reflects the negative impact of inflation and interest rates on disposable income and household spending, and their dampening effect on overall business investment.
Evidence from recent BCC business surveys also showed business confidence levelling off after a brighter start to 2023.
Trade is also likely to continue to suffer, with both imports and exports forecast to be down significantly in 2023 (-4.7% and -4.3% respectively) due to weak global demand and the continuing impact of Brexit. Further regulatory changes at both the UK and EU borders are also likely to weigh on trade flows.
With a stronger start to 2023, but a number of economic indicators now flashing red and a subdued global outlook, the BCC predicts business investment will contract by 0.1% in 2024, a downward revision of 0.7 percentage points, before rebounding to 1.2% in 2025.
Average earnings to perform more strongly
Despite the gloomy economic outlook, average earnings are now expected to grow more strongly over the next three years, with 5.5% growth in 2023 and 3.5% in 2024 and 2.5% in 2025, this is marginally above the forecasts for year-end CPI inflation in the next two years.
With core inflation remaining stubborn, and fears that wages could continue to put upward pressure on prices, the Bank of England interest rate is now expected to peak at 5.5% in the second half of 2023. It will then fall more slowly than previously forecast – decreasing by just 0.25 percentage points in 2024 to 5.25%, and then 4.5% in 2025.
Further growth in unemployment rate
While the number of vacancies continues to decline, the slow rate of change means the labour market is expected to remain tight. This is backed up by BCC research showing record numbers of organisations reporting recruitment difficulties – particularly in the hospitality, retail, and manufacturing sectors. However, some modest growth in the unemployment rate is also expected, with upward revisions for all three years – rising to 4.2% in 2023, 4.7% in 2024, and 4.6% in 2025.
Commenting on the forecast, Vicky Pryce, Senior Member of the BCC Economic Advisory Council, said:
“The BCC’s latest forecast shows the UK economy is continuing to teeter on the edge of a recession. But the fact is, that with growth predicted to hover so close to zero for three years, it will still feel a lot like one for most people and businesses.
“The impact this will have on consumer spending, coupled with a poor trade performance, will only generate more uncertainty for firms.
“The Bank of England’s own forecasts take a similarly dour view, so firms will be watching closely to see how this feeds into decision-making around interest rates.
“There is currently little on the table to provide companies with any crumbs of comfort. As we head towards an election next year, politicians will have to show how they will work with the business community to find solutions.”
David Bharier, Head of Research at the British Chambers of Commerce, said:
“Our latest forecast reflects how many SMEs firms are struggling to rebuild confidence following three years of economic shocks. Prolonged inflation, skills shortages, and new trade barriers with the EU have fed into a climate of little or no growth.
“A rapidly increasing proportion of SMEs are also now worried about interest rates, which have dramatically raised borrowing costs in many cases.
“With further trade barriers looming, leading to higher import costs, and tightness in the labour market persisting, it is difficult to see how large-scale investment will be unlocked. Government needs to work with business to develop a clear path for the economy to promote investment and growth.”
Paul Butterworth, CEO of Chambers Wales South East, South West and Mid, said:
“While the economy remains on course to avoid recession, the slow growth rate continues to impact businesses in Wales, how they operate and plan their day-to-day business.
“Chambers Wales South East, South West and Mid has heard from Welsh business through our Quarterly Economic Surveys and spoken with business owners about their ongoing concerns around higher interest rates and inflation. This is reflected at a UK level in the British Chambers of Commerce’s latest economic outlook.
“These factors, along with access to skilled labour and the skills gap with increased wages, continue to put businesses under pressure that adds to a reluctance for companies to invest in training and innovation locally, and ultimately economic growth for Wales.
“With an election likely in 2024, politicians and policymakers of all parties should listen to local business concerns and work with Chambers and SMEs across the country to find solutions that enable businesses to grow.”