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UK economy faces recession before year end

·Business Reporter, Yahoo Finance UK
·3-min read
UK economy: Drone view of the financial district in London.
UK economy: Inflation is also forecast to reach 14% in the final three months of this year, an upwards revision of four percentage-points from the previous projection of 10% Photo: Yann Tessier/Reuters

The UK economy is expected to plunge into recession before the end of the year amid soaring inflation.

The British Chamber of Commerce (BCC) again downgraded its expectations for UK gross domestic product (GDP) growth for 2022, to 3.3%, thanks to a deteriorating economic outlook.

This was down from 3.5% in the second quarter, and significantly below the 7.4% growth recorded in 2021.

Inflation is also forecast to reach 14% in the final three months of this year, an upwards revision of four percentage-points from the previous projection of 10%.

But the CPI rate is expected to slow to 5% in 2023, and finally return to the Bank of England’s (BoE) target of 2% in 2024.

Read more: FTSE 100 hits six-week low as recession fears spook investors

Inflation is expected to outpace growth of earnings by over 3:1 in Q4 2022, with average earnings increasing by 4.5% in Q4 2022.

The BCC added that it expects negative economic growth for Q2, Q3, and Q4 of 2022, three consecutive quarters of contraction.

However, unlike the BoE, it believes the economy will grow in 2023, albeit at a very low 0.2%, with a slight increase to 1% in 2024.

The BCC said: “These anaemic predictions for GDP growth are in light of deteriorating economic conditions; rising energy costs, a decline in household spending and real wages; weaker export prospects and a pessimistic global economic outlook; poor investment conditions and weakening business confidence and cashflow.”

Watch: How does inflation affect interest rates?

Many of these issues were initially caused by the global response to the COVID-19 pandemic and have been exacerbated by the war in Ukraine.

Its forecast for the Bank of England’s interest rate remains unchanged; the rate is expected to increase from 2% in 2022 to 3% in 2023 and 2024.

Meanwhile, business investment is set to grow at 2.7% this year, an upward revision from the Q2 forecast of 1.8%. This is likely to be driven by growth in building construction rather than spending on machinery or equipment.

However, it is expected to increase by only 0.6% in 2023, slightly down from the 0.8% growth predicted in Q2. Overall investment is expected to grow by 4% this year but shrink by 0.4% in 2023 before rebounding to 1.1% in 2024.

Consumer spending is now forecast to grow at 3.8% in 2022, a fall from the 4% predicted in Q2.

Read more: What is stagflation and can it lead to a recession?

“Our latest quarterly economic forecast will not be of any comfort to either consumers or businesses,” Alex Veitch, director of policy at the BCC, said.

“The extreme inflationary pressures already present are only likely to increase as we head towards Christmas; with the UK economy already thought to be in recession. Tackling these pressures must be at the top of the new prime minister’s inbox when they take up their position next week.”

He added: “Action is needed now, and the BCC has set out a comprehensive plan for the government to provide vital support to firms.

“Along with taxation and labour measures, the BCC business support plan includes key asks to help businesses with spiralling energy costs. These include COVID-style support by introducing a government emergency energy grant, a temporary cut in VAT on energy bills to 5% to reduce costs for firms and increased regulation of the energy market for businesses by Ofgem.

“Through our extensive research and forecast work, we know the problems currently facing businesses. Time is fast running out, the government must step up to the plate and do what is needed to protect businesses, livelihoods and jobs.”

Watch: What is a recession and how do we spot one?