UK’s economy set to shrink by 1.3 per cent in 2023 – KPMG
A shallow yet protracted recession will see the UK’s economy shrink by 1.3 per cent in 2023, however a partial recovery, which could see a rise un GDP of up to 0.2 per cent, should follow In 2024.
This is according to KPMG’s latest UK Economic Outlook Report, which states that the UK is estimated to have entered a recession in quarter three of 2022 which may hold until the end of next year and see a 1.9 per cent drop in output.
High levels of inflation and rises in interest rates are expected to squeeze households’ living standards, with household consumption having already dropped by 0.6 per cent per capita and KPMG projecting a further fall of 3.4 per cent by the middle of 2024.
Ongoing world events and rising interest rates are also hitting business too, with KPMG expecting an overall shrink in investments of 0.7 per cent next year, recovering by 0.2 per cent in 2024. Unfortunately, the deteriorating economic environment means many companies may not last that long, with high levels of insolvencies expected.
Yael Selfin, Chief Economist at KPMG UK, commented on the report: “The increase in energy and food prices during 2022, as well as higher overall inflation, have significantly reduced households’ purchasing power.
“Rising interest rates have added another headwind to growth. Lower income households are particularly exposed to the mix of current price pressures, as the most affected spending categories largely fall on necessities, with few substitutes in the short run.
“Households are expected to rein in spending on discretionary items in 2023 in response to the squeeze on income. As consumers cut back on spending, we anticipate a sharp reduction in non-essential categories of spend by those households most affected by the rise in energy and food costs, including spending on eating out and entertainment.”
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KPMG has also scaled up its forecast for average inflation next year to 7.0 per cent, up 5.6 per cent, with this expected to hit its highest point in October before falling gradually in the following months.
This is all leading to a cooling off in the employment market, as lower turnovers put less pressure on employers to recruit and employees become less likely to change jobs while economic outlooks remain uncertain. This is expected to move bargaining power back towards employers, which then may see a moderation of the robust pay growth experienced in 2022.
The depreciation of the pound may help support export growth, although exports are expected to be affected by weaker demand among UK’s trading partners. Overall export volumes are still some way from their pre-pandemic levels, with the UK performing relatively poorly since the global pandemic. KPMG expect UK exports to rise in 2023 by 4.6% and by 1.1% in 2024.
Yael Selfin said: “The outlook could turn more positive, particularly if energy costs drop back to previous levels. However, risks are probably skewed to the downside, given the state of public finances as well as some companies’ balance sheets, which could make it harder for them to absorb any potential further shocks in the short term.
“In addition, a rise in Covid cases during the winter or a further escalation in geopolitical tensions mean that supply chain pressures are likely to remain an issue in the background.”
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