UK’s Economic Resilience Shines Amid Challenges
In a recent economic analysis, experts from EY's Item Club have made an intriguing prediction for the United Kingdom.
Despite facing the challenges of soaring interest rates and an underperforming labor market, the UK is expected to steer clear of a recession, offering a glimmer of hope for its economic prospects.
EY’s Autumn Forecast paints a picture of modest growth, with factors like high-interest rates and an unexpected slowdown in the labor market acting as significant roadblocks. Despite these hurdles, there is a slightly more optimistic outlook for GDP growth in 2023, with forecasts climbing from the earlier projection of 0.4% in the Summer Forecast to a revised 0.6%.
However, a cloud of uncertainty hovers over 2024, as the EY Item Club has adjusted its GDP growth forecast down from 0.8% to 0.7%. The primary culprit behind this revision is the delayed impact of recent interest rate hikes.
One silver lining in this economic narrative is the expected halt in interest rate increases by the Bank of England’s monetary policy committee. According to EY’s analysis, these developments combined with diminishing inflation and a return to real wage growth are crucial factors preventing the UK economy from backsliding into a recession.
The report also brings positive news on the inflation front. After peaking at an alarming 11% last year, inflation is anticipated to cool down to 4.5% by year-end and ultimately align with the Bank of England’s 2% target by mid-2024.
Moreover, there’s no expectation of a further increase in the Bank rate, which currently stands at 5.25%. In fact, the EY Item Club suggests the possibility of a rate cut, potentially commencing in May 2024.
Commenting on the outlook, Hywel Ball, EY’s Chair, highlighted the looming challenge of mounting debt costs for the UK economy over the next year. Nevertheless, amidst the backdrop of high-interest rates, there are encouraging signs of resilience. Inflation is moving in the right direction, average wages are making real gains, and households and businesses maintain healthy financial positions.