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Economy to avoid recession but base rate to hit 5.25%

Samantha Partington
Written By:
Samantha Partington
Posted:
Updated:
12/06/2023

A better outlook for energy prices, greater resilience in the global market and demand for labour outweighing availability means the UK economy is likely to avoid a recession this year, says KPMG.

Its more optimistic outlook for growth is in line with recent forecasts from the Organisation of Economic Co-operation and Development (OECD) and the Confederation of British Industry (CBI), both predicting the UK will now dodge a recession. But big challenges remain ahead.

GDP growth will remain weak by historical standards at 0.3% this year and 1.1% next year, according to the accountancy firm’s forecast. It puts this down to several downside risks including high inflation, recent tensions in the banking system, the uncertain impact of such a rapid rise in interest rates on the economy, and worsening geopolitical tensions.

Inflation at 8.7% has not fallen as quickly as the Bank of England had hoped leading KPMG to forecast three further rate rises from the Bank of England this year, taking the base rate to a peak of 5.25%.

Although it was widely expected in 2022 that the UK would enter a technical recession, which is two consecutive quarters of negative GDP growth, so far this has been avoided.

Government support for households and business to cope with higher energy prices, low unemployment as job vacancies outnumber available workers and an excess of savings built up during the pandemic has alleviated pressure on household budgets.

‘Slightly stronger momentum for UK economy’

But KPMG says the impact of monetary tightening has yet to fully feed through to the economy, in part due to the stock of fixed rate mortgages that have yet to expire.

Yael Selfin, chief economist at KPMG UK, said: “We’ve seen slightly stronger momentum for the UK economy but risks are still elevated on the downside. Stickier inflation will see monetary policy tightening even further, increasing the risk of unwelcome side effects among other potential headwinds.”

KPMG forecasts that inflation will fall to 7.7% this year and 2.9% in 2024, unemployment will rise from 4.3% this year to 4.6% in 2024 and consumer spending will rise from 0.2% in 2023 to 0.6% next year.

The CBI has a slighter brighter outlook with expectations that the economy will expand 0.4% this year and 1.8% next year. The industry body had previously thought a 0.4% contraction in 2023 was on the cards. Aside from falling energy prices, the CBI says its upgrade was down to the re-opening of China’s economy from Covid restrictions and the easing of supply chain disruptions. The OECD, meanwhile, upgraded its forecast from a 0.2% downturn in 2023 to growth of 0.3%.