UK economic forecast: June 2023

UK outlook: glass half full?

We have upgraded our forecast for economic growth so that we no longer expect the economy to fall into a mild recession this year, instead predicting growth of 0.4% over 2023. The near-term outlook is supported by falling inflation – in part driven by lower wholesale energy prices – giving some breathing space to households, and a more favourable global outlook. However, inflation is not expected to fall back as swiftly as expected back in December. Meanwhile, the upgrade to our forecast still entails sluggish growth for the economy, as high inflation continues to put pressure on households and pushes interest rates higher. A mild pick-up in growth next year (to 1.8%) masks longer-term challenges for the economy: with exports and business investment underperforming, and productivity remaining lacklustre.

What does this forecast mean for business?

Our latest forecast is a tale of two halves. On the one hand, we now expect a somewhat better outlook for growth – significantly, we no longer expect the mild recession that we were predicting at the end of last year. All else equal, this should translate into better, albeit still pretty weak, demand conditions. Similarly, wholesale energy prices have fallen considerably since our last forecast, which should alleviate that aspect of cost pressures for firms. But cost profiles will vary considerably by business and sector, and other inflationary pressures are stronger than previously expected. Meanwhile, a tight labour market is likely to keep pressure on wage growth in the near-term. And businesses should be conscious of the potential for a couple more interest rate rises in the coming months.

Despite a somewhat better growth outlook, this year will be another difficult one for households. Another year of high (albeit falling) inflation will weigh on real incomes and put pressure on bottom lines for consumer-facing companies. Furthermore, despite an upgrade to near-term GDP growth, our forecast expects little change in the longer-run challenges plaguing the UK economy. While we see a modest pick-up in productivity growth, it remains below its (already weak) pre-COVID trend, and much lower than the trajectory seen before the 2008 financial crisis. Almost 15 years of near-stagnant productivity carries profound implications for potential growth and living standards.