Economic growth to pick up but risks to recovery ‘elevated’, say UK forecasts | Economic growth (GDP)

Britain will be left with deep scars from the pandemic despite narrowly escaping a second recession within three years and growing signs of an economic pick up, according to new forecasts.

A new report by the accountancy firm KPMG has found that the economy has enjoyed a better start to the year than it had thought, and is now expected to grow by 0.3% this year, compared with its previous prediction of an uplift of just 0.1%.

However, British households and businesses are set to suffer more financial pain with the Bank of England expected to raise the base interest rate – currently 4.5% – three more times this year in order to tame the stubbornly high rate of inflation.

“We’ve seen a slightly stronger momentum for the UK economy,” said Yael Selfin, chief economist at KPMG UK.

“The UK economy has so far avoided a technical recession. But risks are still elevated. A stickier inflation will see monetary policy tightening even further, increasing the risk of unwelcome side effects, among other potential headwinds.”

KPMG said that, while inflation eased to 8.7% in April – down from 10.1% in March and a peak of 11.1% last October – it was not falling as fast as had been hoped.

The firm expects the Bank to continue its run of 12 consecutive increases in the base rate of interest, hitting a peak of 5.25% later this year.

“Inflation is on the way down, but the pace of moderation is slower than we previously thought,” said KPMG. It added that this would probably require further interest rate increases and bring more pain for borrowers.

KPMG said that there was some positive momentum, including Ofgem lowering the energy price cap to £2,074 a year for a typical household as wholesale gas prices fell, and the services industry receiving a post-pandemic boost due to pent-up demand stemming from several years of Covid-19 restrictions.

The accountancy firm has pencilled in 1.1% growth for 2024, with inflation expected to fall back to 2.9% and the base interest rate forecast to settle at 5%.

Another accounting firm, BDO, reported that a 10-month high in output from the services sector delivered a confidence boost for businesses in May while recruitment activity remained resilient.

The firm said its monthly “optimism index” grew for the second consecutive month to 99.75, increasing by 1.53 points to its highest reading since August 2022, when concerns of a recession first set in.

Separately, the embattled Confederation of British Industry (CBI) has reversed its forecast for this year of a 0.4% decline, and now expects growth of 0.4%.

However, the CBI said that the pandemic would leave the UK economy 7% smaller than it would have been had the global health crisis never happened. It said that, among other leading developed nations, only Germany had suffered worse scarring.

Germany and Ireland have both fallen into a technical recession this year, which is defined as recording two consecutive quarters of negative growth.

While narrowly avoiding a recession, the CBI said 2023 would prove challenging for households and businesses. For the first time since the recession of the early 1980s, it expects real household incomes – a measure of living standards – to fall for two successive years.

The business lobby group last week won support from its remaining members to continue speaking for firms after vowing to reform its culture and governance after allegations of sexual misconduct reported by the Guardian. Its relationship with the government remains on hold.

Rain Newton-Smith, the CBI’s new director general and previously its chief economist, has made forecasting a key part of her organisation’s strategy as it battles to survive.

“Businesses and consumers alike will be relieved that the UK economy has avoided recession and will re-enter growth territory in the second half of this year,” she said. “But firms want to see growth – and productivity – pick up pace. We want to see the UK at the top of the global league tables once again.”