UK recession set to go down despite better economy

86
3
UK recession set to go down despite better economy

Despite the fact that the economy is performing much better than predicted just a few months ago, new forecasts out today show that a recession is still on the cards in the UK.

Higher interest rates and households responding to the cost of living crunch gripping their finances by trimming spending are predicted to push GDP 0.3 per cent lower this year, according to consultancy KPMG.

The Bank of England is jacking up borrowing costs to tame the worst inflation surge in four decades and families are being hit by the worst inflation surge in four decades.

Bank Governor Andrew Bailey and his team of economists bumped rates up for the eleventh time in a row last week to 4.25 per cent, a post-financial crisis high, as he stepped up the central bank's fight against inflation, which rose to 10.4 per cent last month.

KPMG reckons that the Bank will keep rates at that level for the whole of the year, weighing on household and business spending.

In its latest set of UK and global economic forecasts, the firm said that although the likelihood of a UK recession has fallen, it has not dissipated completely.

A bunch of economists have dropped their recession warnings recently in response to firms and families holding up better than feared under the cost of living crisis.

The Office for Budget Responsibility UK's official forecaster, at Jeremy Hunt's first budget earlier this month, raised its GDP forecasts for this year on the basis that households will raid their savings to maintain spending.

Bank of England officials also scrapped their recession warning at the end of last week's rate decision. In November, they had predicted that the UK was on course for the longest recession in a century.

Despite the rosier outlook, the OBR chief Richard Hughes warned on the BBC s Sunday with Laura Kuensberg that families are grappling with the biggest hit to their living standards since records began.

The slowdown in the housing market caused by higher mortgage rates freezing potential buyers out of a home purchase would affect economic growth, according to KPMG boffins.

They said that higher costs of borrowing and a slower growth outlook are expected to lead to weakening business investment over the course of the year.

The UK is expected to be the only G 7 country to have an economic contraction this year. Growth is poised to drop next year, with GDP set to move just 0.6 per cent higher.

A decline in inflation to just over the Bank's two per cent target by the end of the year could cause Bailey and co to relieve pressure on households and businesses by slashing borrowing costs in 2024.

The Bank of England will have a chance of a series of gradual rate cuts next year, bringing the base rate to 3.5 per cent by the end of 2024, as a result of slowing growth and lower inflation, according to the forecasts.

In 2023, global output will increase by 2.1 per cent and will increase to 2.4 per cent in 2024, according to KPMG.

India is projected to have the strongest growth of any country monitored by the consultancy, hitting 6.4 per cent and 6.9 per cent this year and next year.