UK economics: the only advanced economy to witness a recession
Despite ending 2022 with the firm belief the UK had entered a technical recession, the economic data is proving to tell a different story.
3 minutes to read
Last updated: March 2023
GDP grew by 4.1% in 2022, down from 7.4% in 2021. The economy contracted by 0.5% in December, however after growing by 0.1% and 0.5% in November and October the technical recession threshold was not met.
But looking solely in the rear-view is wasted energy. As noted in my five indicators for 2023, consensus is currently of the UK economy contracting by 0.9% in 2023 before growing 1.2% in 2024. The IMF’s January forecasts point to a shallower 0.6% contraction, but the UK is the only advanced economy expected to see a contraction this year.
The Bank of England recently cut its forecast length of recession in half to five quarters with peak-to-trough fall in GDP of 1%. The downturn, which undoubtedly we are experiencing even if not a technical recession yet, is likely to be shallow when compared to previous cycles.
Unemployment is expected to tick up with the OBR forecast and consensus being that it will peak at 4.9% in 2024, from 3.6% currently. Whilst this is low there are some hidden nuances with inactivity rising by 6% since the onset of Covid-19, driven by the 15% rise in long-term sickness. Overall, whilst loosening marginally the labour market is still a source of underlying strength.
Short-term inflation to turn to sharp declines
Inflation is perceived to have peaked at 11.1% in October 2022, and since receded to 10.1% in January. Natural gas prices have fallen back to a fifth of their 2022 highs helping to alleviate energy bills concerns.
The OBR forecasts that inflation will drop sharply over the course of the next year, falling to less than 1% in 2024 and deflation in 2025. The latest view of the Bank of England is 4% by the start of 2024 and 1% by the start of 2025. This is below consensus, over 2.5% in 2024, but will alleviate some pressure on rates.
The Bank of England has gone from a bank rate of 0.1% at the end of 2021 to 4% at the beginning of February. The base rate is likely to peak in the first half of 2023, with the markets pricing just 4.5%. Mortgage rates have come down but may have to rise a little as markets catch up having previously jumped the gun.
Going green
In January the Mission Zero Review by Chris Skidmore was published looking at the UK’s transition to net zero. Not only does it review progress so far but sets out opportunities and benefits to individuals and the economy and a clear call to action.
“McKinsey estimates a global market opportunity of £1 trillion for British businesses by 2030 and the Government estimates that the transition can support 480,000 jobs in 2030.” But given that other countries are seeing the opportunity and acting, such as the US$369 billion investment in clean technology in the US’s Inflation Reduction Act – the UK now needs to go further and faster to realise the economic benefits. We have long spoken about the role the property industry will play but this spells a lot of opportunity broadly for the UK economy and our industry.
The UK is suffering from some structural issues that are now being exacerbated in a higher interest rate environment. The next few years could prove pivotal in resetting and creating greater opportunity for growth, especially in regards the transition to net zero.
Read more or get in contact: Flora Harley, residential research
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