UK economy at ‘significant’ risk of recession in 2023, says think tank

UK economy: British Chancellor of the Exchequer Jeremy Hunt
NIESR urged that rises in taxation and public spending cuts are not necessary in Jeremy Hunt’s budget on Thursday, and may further damage the UK economy's growth prospects. Photo: Hannah McKay/Reuters

The UK economy is not expected to suffer a recession in 2022, however there is a "significant" risk of a downturn in 2023, a think tank has warned.

According to the National Institute of Economic and Social Research (NIESR), gross domestic product (GDP) growth is anticipated to be 0.8% year-on-year in 2023 and 1.8% in 2024.

Following Friday’s GDP data, which showed a 0.2% contraction in the third quarter, NIESR now forecasts flat GDP in Q4, and a fall in the first three months of 2023.

However, contrary to the Bank of England (BoE) it does not expect a two-year long recession.

In its pre-autumn statement independent forecast on Thursday, NIESR said that the Energy Price Guarantee (EPG) has lowered the peak in CPI inflation, which it now expects to be 11% in January 2023 instead of 14%.

It thinks inflation is likely to be more persistent than previously forecasted, only falling to 5.7% by the end of 2023, and not reaching the central bank’s target of 2% until the third quarter of 2025.

Watch: How does inflation affect interest rates?

Nominal wage growth is also expected to remain high over the duration of the forecast, with average earnings to grow at 5.7% in 2023, 4.4%, in 2024 and 2.3% in 2025.

“However, given this is not keeping pace with inflation, we predict that real wages will continue to fall until late 2023,” it said.

Paula Bejarano Carbo, NIESR data analyst, said: “Today’s ONS estimates confirm a production-driven contraction in GDP in the third quarter of this year, with a quarter-on-quarter fall of 0.2%. We are currently expecting GDP to be flat in the fourth quarter of this year.

“However, given that October PMIs recorded figures below the neutral 50 for both the services and manufacturing sectors, consumer and business confidence is plummeting, and higher-than-expected inflation and interest rates continue to squeeze budgets, the risk of a contraction in GDP in the fourth quarter of this year remains elevated.

“Whether the chancellor’s upcoming autumn statement will alleviate or aggravate current recessionary risks will become clearer next week.”

Read more: UK house prices to fall in 2023 amid rising mortgage rates – RICS

The think tank said rises in taxation and public spending cuts are not necessary in Jeremy Hunt’s budget on Thursday, and “may further damage the country’s already anaemic growth prospects”.

Faced with the triple shock of soaring energy, food and housing costs, nearly 6 million households will see their savings fall to negligible levels despite the EPG and other support measures, it said.

It projected that nearly one in five households will have little or no savings by April 2024 and will therefore struggle in the absence of further government assistance.

The rise in mortgage interest rates is further affecting households. As well as those households with fixed-rate mortgages coming up for renewal in the coming months, analysis showed that mortgage repayments on a variable rate will rise by at least 50% on average when Bank rate hits its projected peak of 4.75%.

This, alongside projected rent increases, may push an additional 250,000 households into extreme poverty.

NIESR has proposed a £2bn Housing Support Fund administered at local authority level to help with fast-rising housing cost

Read more: Pensioners call on Rishi Sunak to keep pensions triple lock in Autumn budget

“The government should…help the hardest-hit households and put in place a plan for reducing public-sector debt once the shocks have dissipated.

“As a result of previous rounds of spending cuts, some public services cannot return to pre-pandemic levels of activity. Reducing spending further would exacerbate the situation. If the government really is serious about growth, it should not be reducing the capital investment.”

NIESR has recommended that the government use the autumn statement to raise benefits in line with inflation to prevent a further increase in destitution, which already affects around 1.2 million people.

It has also asked it to introduce a universal credit (UC) uplift of £25 per week for twelve months at a total cost of £2.7bn, while maintaining capital spending outside London and the South-East, and working with business to unlock private investment.

Professor Stephen Millard, deputy director for macroeconomics, said: “With the economy still reeling from the effects of the terrible Russian invasion of Ukraine and the monetary policy committee raising interest rates to bear down on inflation, now is not the time to be tightening fiscal policy.

“In fact, given that existing announcements have already restored stability to the financial markets and high inflation continues to benefit the overall fiscal position, it’s not at all clear that the chancellor needs to raise taxes or cut spending in the autumn statement next week. It just doesn’t have to be this way! ”.

Watch: How to save money on a low income