Economy to shrink in 2023 before rebounding: Report

The report said in 2023, the economy will shrink by 0.3 per cent before returning to growth in 2024 and forecast that by the last quarter of this year, inflation will slow to 5 per cent.

In the immediate term, the BCC is now expecting the first quarter of 2023 to see GDP fall, before three-quarters of flat or weak growth — leading to an overall contraction of 0.3 per cent for the year. 

The BCC also expects the economy to grow in 2024 at 0.6 per cent, compared to the Bank of England’s forecast of 0.25 per cent shrinkage.

The expectation for 2023 has been revised upwards from -1.3 per cent in the BCC’s last forecast due to a more resilient economic performance at the end of 2022. Household spending held up well despite a fall in real disposable income due to rising energy costs, inflation outstripping wages, frozen income tax allowances, and higher mortgage payments. 

Exports were also stronger than expected in the second half of 2022, in part due to fuel and machinery demand and also trade in precious metals — likely seen as a safe harbour in uncertain times. However, this trend is not expected to continue with a 4.5 per cent decline in exports predicted across 2023. BCC research also showed that while overall export values have held up, many smaller companies are not reporting any improvements in their trading conditions.

Despite a big drop in business confidence in Q3 2022, this now appears to have stabilised albeit at a lower level. Business investment has now returned to pre-pandemic levels, although it was not performing well then. With an expected rise in corporation tax coming down the tracks, alongside a business rates revaluation in April and higher interest rates, this is likely to lead to flatlining investment in 2023 at 0.2 per cent.  

Businesses and consumers will continue to face high costs due to inflation. But the current downward trajectory, following a peak of 11.1 per cent in October 2022, is likely to continue throughout the year, ending at 5 per cent in Q4. The CPI rate is expected to continue to slow and drop below the Bank of England’s target to 1.5 per cent in Q4 2024. It is then expected to rise again in 2025, returning to the 2 per cent goal. This means prices will continue to rise, at slower rates and they will stabilise at a much higher level than two years ago. Average earnings growth will lag behind inflation until 2024.

The forecast for the Bank of England’s interest rate has moderated following the big uptick after the mini-budget of September 2022. The rate is now expected to end 2023 at 4.25 per cent, just a quarter of a percentage point higher than the current rate. It should then fall to 3.25 per cent by Q4 of 2025, though this is still much higher than the historically low rates, below 1.0 per cent, seen for more than a decade.

Overall investment is expected to contract by 1.5 per cent in 2023, but business investment will make a positive contribution of 0.2 per cent. Household consumption is also expected to fall by 0.4 per cent and government spending is expected to increase by 1.8 per cent.  The overall picture for 2024 showed a return to growth but only at a level that will see the UK economy finally get back to its pre-pandemic size (Q4 2019) in the final quarter. Net exports, household spending, and business investment will all be in weak positive territory, but with the contribution of government spending falling, the recovery will be lacking in strength.

Alex Veitch, director of policy at the British Chambers of Commerce, said although the economy should now avoid a technical recession, the stark reality is that businesses face a very difficult year ahead. 

“With the Government having little fiscal headroom for the Spring Budget, it is vital it spends the money it has got wisely,” he said. 

“Businesses tell us they are most concerned about the difficulties in recruiting staff, paying their energy bills and rising taxes. 

“We know we have a tough year ahead and there is currently little incentive for firms to risk ploughing their dwindling cash reserves or fresh loans into new projects. 

“But unless we unlock investment into growth areas of our economy, then the UK will get left behind by our competitors.

“The Chancellor must show more faith in the ability and talent of our businesses. If he backs them, by acting on childcare to ease staff shortages and helping them manage their energy costs, then the UK economy could still prosper.”