British Economic Outlook for 2023
British Economic Outlook expects the UK economy to grow slowly in 2023, with only a low risk of recession. However, real wages are forecast to fall below pre-pandemic levels and many households will struggle to make ends meet.
Long-term challenges persist — including lagging productivity growth, a surge in energy costs and Brexit’s impact on trade and investment. This will be a major test for macroeconomic policy.
Growth
LONDON — The U.K. is expected to avoid a recession in 2023 and “maintain positive growth,” according to the International Monetary Fund’s latest health check on the country. That’s a far more upbeat outlook than its previous World Economic Outlook released in April, when the Fund expected the economy to contract this year and was bottom of the G7 group of major economies.
The uplift reflects stronger global growth, lower energy prices and fiscal support in the spring budget. But it is unlikely to offset a weakening domestic demand profile and persistently high interest rates, which limit household spending.
The UK’s high levels of economic inactivity are expect to start fading as more people return to work this year, which should help ease staff shortages in highly skilled sectors. But medium-term challenges remain, including weak investment in the UK relative to other major economies and slower trade growth after Brexit. And soaring house prices will likely keep households from saving as much as they would like.
Employment
While the economy is adjusting to higher interest rates, the outlook for the labour market is still tight. Across the BCC’s business surveys, record numbers of organisations report recruitment difficulties, especially in hospitality and retail. This is partly due to the fact that increases in the National Minimum Wage and National Living Wage have impacted their wage bills significantly.
Inactivity in the working-age population has fallen gently since last summer, but more support will be need to encourage those on long-term sickness back into work. Measures such as extending access to free childcare will also help.
Overall, growth prospects appear to be materially stronger than the Bank’s February Report, helped by a strengthening global economy and faster-than-expected pay growth. But, domestically, slower public sector investment and a potential hit to productivity from slower private sector growth pose risks to the economy’s long-term potential. This could be compound if rising inflation leads to further policy tightening by the government or, abroad, if US-China decoupling and protectionism weigh on global potential growth.
Inflation
The British economy is expect to avoid recession this year, boosted by falling energy prices and easing concerns over Brexit, says the International Monetary Fund. But the IMF also cautions that inflation is “still stubbornly high” and interest rates need to remain higher for longer.
Private consumption and business investment have weakened amid rising living costs. The Bank of England’s interest rate rises have exacerbated this squeeze. This is expected to slow growth and could lead to a contraction of the economy.
But household spending has recovered in recent months and wet weather has helped boost July receipts from self-assessed income tax. We expect that business investment will rebound in the second half of the year as firms regain confidence and find new markets for their goods. With interest rates still rising and the prospect of a slowdown in China and global growth, it may take time for the UK economy to reach pre-Covid levels.
Trade
The UK economy avoided a technical recession in 2022, but household spending remains under pressure from higher energy prices and rising borrowing costs after the Bank of England’s sharp rate increases. This is expect to weigh on business investment.
The weaker economic outlook means there will be fewer people on high incomes, which reduces demand for luxury goods and other expensive imports. This reflects the legacy of the pandemic, but also a long-term trend as global demand growth slows and economies become more services focused.
In the medium term, growth is expected to pick up as uncertainty fades. However, the impact of the UK leaving the EU will depend on the nature of the new trading arrangements and the extent to which new barriers to trade are impose. This could lead to a widening of the gap between the UK and the rest of the world, which would be a further drag on growth. In the long term, the UK’s growth prospects are not expect to shift materially.
