The looming UK recession could be twice as severe as previously thought, according to leading economic forecasters from business consultancy EY.
Reduced government support, higher taxes and a generally worsening outlook have led company analysts to conclude that the next three years could be worse than they anticipated three months ago.
In October, EY’s Item Club had forecast a 0.3% contraction in gross domestic product (GDP) this year, followed by 2.4% growth next year and a 2.3% rise in 2025.
But in an updated forecast released Monday, he said GDP would fall 0.7% this year, followed by 1.9% and 2.2% growth in the next two years.
The downgrade is at odds with recently released economic data and sentiment emerging from the World Economic Forum in Davos, which suggested the global outlook was not as bleak as originally feared. In recent weeks, the FTSE 100 has been approaching its all-time high.
“The UK economic outlook has turned bleaker than anticipated in the autumn, and the UK may already be in what has been one of the longest-anticipated recessions in living memory,” said Hywel Ball, chairman of EY in the UK.
Ball said that while the recession could be deeper than previously thought, it would not necessarily last longer than previous forecasts indicated.
EY said it was not yet clear whether the country was already in recession, as defined by two quarters of consecutive GDP contraction. While the economy contracted in the third quarter of last year, GDP figures released this month showed the economy unexpectedly grew by 0.1% in November, leading some economists to think the fourth quarter could be positive. .
Despite this, EY said the UK was still expected to enter a recession this year, shrinking through the first half of 2023, before returning to growth over the summer. The recession would also likely prove less damaging to the economy than the recessions of the 1980s, 1990s and 2000s, she added.
“The silver lining is that, despite being a deeper recession than previously predicted, it won’t necessarily be longer,” Ball said. “The economy is still expected to grow again during the second half of 2023 and has been spared any further significant external shocks in the last three months due to energy prices, Covid-19 or geopolitics. Meanwhile, the main drag on activity over the last year, high and rising inflation, may be starting to recede, while energy prices are also falling.
Economists forecast inflation to hit 7.2% this year on average, including a big jump when the government’s energy support scheme becomes £500 a year less generous for the typical household from early April.