The EY ITEM Club has downgraded UK GDP growth projections for the next three years, with warnings that a recession is likely to prove deeper than previously expected.
EY said a combination of high inflation, falling real incomes, rising interest rates, and tighter fiscal policy are the primary drags on growth.
The Club’s Winter Forecast predicts that the economy will now contract 0.7% in 2023, bigger than the 0.3% contraction predicted in October.
The impact of tighter fiscal policy and a deeper downturn, particularly on business investment, means the growth forecast for 2024 has also been downgraded from 2.4% to 1.9%.
Growth of 2.2% is expected in 2025, down from the previously forecast 2.3%. The UK economy is expected to have grown 4.1% in 2022.
Key factors behind the downgrade for the 2023 forecast include the reduction in the generosity of the Energy Price Guarantee, additional taxes on high-earners and unearned income coming into effect from the spring, and signs that the housing market is slowing faster than many had anticipated.
GDP growth in November 2022 means it’s now more touch-and-go whether a recession began last year. However, the challenging outlook suggests that GDP is likely to shrink over the first half of 2023.
That said, the UK economy is still expected to return to growth in summer 2023 and into 2024 as inflation falls back and consumers use strong balance sheets to save less and spend more.
The EY ITEM Club added that this downturn should prove less damaging for the economy – and shorter – than downturns in the 1980s, 1990s, and 2000s.
This is due to the unusual and externally driven nature of the recession, combined with the prospect of inflation falling back quickly this year. Nevertheless, the economy is not expected to regain its pre-pandemic size until the middle of 2024.
Hywel Ball, EY’s UK chair, said: “The UK’s economic outlook has become gloomier than forecast in the autumn, and the UK may already be in what has been one of the mostly widely anticipated recessions in living memory.
“The one silver lining is that, despite being a deeper recession than previously forecast, it won’t necessarily be a longer one.
“The economy is still expected to return to growth during the second half of 2023 and has been spared any significant new external shocks in the last three months from energy prices, Covid-19 or geopolitics. Meanwhile, the chief headwind to activity over the last year – high and rising inflation – may be starting to retreat, while energy prices are falling too.”
