UK ‘poised to avoid recession’ but interest rates take a toll
The UK economy will grow faster this year than previously thought, but will struggle to get up to speed in 2024 due to the delayed impact of rate hikes, a forecast warns.
The EY ITEM Club report forecasts the UK economy will grow by 0.4 percent in 2023, up from its previous April estimate of just 0.2 percent.
But the outlook for the next few years is murky according to the forecaster – who uses the British Treasury model. It expects the economy to grow by just 0.8 percent in 2024 – down from the previously forecast 1.9 percent – and 1.7 percent in 2025, down from 2.3 percent.
Meanwhile, the persistence of inflation means it won’t be until 2025 — rather than a previously thought 2024 — that annual wage growth will finally exceed annual average inflation.
This suggests that the value of wage packages will continue to fall in real terms until then.
Tough times: The UK economy will grow faster this year than previously thought, but it will be difficult to get up to speed in 2024
It means many voters won’t see an improvement in their finances until after next year’s general election.
Hywel Ball, from EY, said: ‘The economy is past the series of shocks that have plagued it in recent years, but their repercussions are long-lasting and are holding back growth in the UK.’
It comes after figures last week showed a larger-than-expected fall in inflation in June gave hope to consumers struggling with the cost of living.
It also provided light at the end of the tunnel for borrowers – that interest rates may not have to rise as far as feared.
The EY ITEM Club report reflected the fact that inflation has turned out to be more stubborn than the last forecast in April – meaning interest rates will also stay high for longer.
But it said more positively that “the resilience of the economy so far this year translates into an improved outlook for 2023.”
“The economy remains on track to avoid a recession,” the report said.
However, higher interest rates will limit companies’ willingness to spend in 2024, the forecast said. Those higher rates will also take their toll on the housing market, where prices will stagnate this year and fall by 4 percent in 2024.
The forecast said the impact of higher borrowing costs was offset against the stimulus to the economy from falling energy prices, easing pressure on the supply chain and a growing workforce.