UK Heading Towards Five Years of Lost Economic Growth

Main points

• Despite continuing to expect the United Kingdom to steer clear of a recession in 2023, GDP is projected to grow barely by 0.4 per cent this year and by 0.3 per cent in 2024, with the outlook remaining highly uncertain. There are, in fact, even chances that GDP growth will contract by the end of 2023 and a roughly 60 per cent risk of a recession at the end of 2024.
• We forecast inflation to remain continually above target until 2025. More specifically we expect it to fall to 5.2 per cent by the end of 2023 and to 3.9 per cent by the end of 2024, as the effects of the rises in Bank Rate over the past year start to take effect. Nevertheless, with core inflation at 6.9 per cent, and other underlying inflation measures remaining high, we see significant risks to our inflation forecast, which could result in inflation being higher than anticipated.
• We have conditioned our forecast on one further 25 basis point rise in Bank Rate - peaking at 5.50 per cent - and advise the MPC makes clear in its communication that, as monetary policy is forward looking, it has done enough to get in front of inflation, as it sets out the path it expects inflation to take towards target. Failing to do so risks further adverse market reaction.
• Low economic growth and stagnant productivity is increasing the financial vulnerability of households in the bottom half of the income distribution and the incidence of destitution at the poorest end. Our projections for the General Election year of 2024 suggest that inequalities of income and assets will grow, with little real income growth for many, low or no savings, higher debt, as well as elevated housing, energy and food costs. As a consequence, the shortfall in the real disposable incomes of households in the bottom half of the income distribution is set to reach some 17 per cent in the period 2019-2024.
• Real wages in many UK regions are expecting to be below pre-pandemic levels by the end of 2024. More specifically, the East of England, South-East and West Midlands will be below pre-Covid levels, with real wages in the West Midlands projected to be around 5 per cent lower than in 2019.
• We expect the number of people available for work to continue to grow with the unemployment rate reaching 4.7 per cent in 2024 and peaking at 5.1 per cent, its ‘natural rate’, by 2026.

See our previous quarterly UK Outlook to follow the analysis