UK ‘prepared to avoid recession’ but interest rates will take their toll
Britain’s economy will grow faster than previously thought this year but will find it hard to pick up in 2024 due to the delayed impact of rate hikes, one forecast warns.
The EY ITEM Club report predicts that the UK economy will grow by 0.4% in 2023, up from its previous estimate in April of just 0.2% growth.
But the outlook for the next two years has darkened according to the forecaster, which uses the UK Treasury model. He expects the economy to grow just 0.8 percent in 2024, down from the 1.9 percent previously forecast, and 1.7 percent in 2025, down from 2.3 percent.
Meanwhile, the stubbornness of inflation means it won’t be until 2025, instead of the 2024 previously thought, that annual wage growth will finally outpace average annual inflation.
This suggests that the value of the payment packages will continue to fall in real terms until then.
Tough times: The UK economy will grow faster than previously thought this year, but will find it hard to pick up speed in 2024
It means that many voters may not start to feel an improvement in their finances until after the General Election next year.
EY’s Hywel Ball said: “The economy is weathering the series of shocks that have hit it in recent years, but their repercussions are long-lasting, holding back UK growth.”
It comes after figures last week showing a bigger-than-expected drop in inflation in June gave hope to consumers struggling with the lower cost of living.
It also offered a light at the end of the tunnel for borrowers: Interest rates may not have to go as high as feared.
The EY ITEM Club report reflected the fact that inflation has proven more stubborn than when it issued its last forecast in April, meaning interest rates will also stay high for longer.
But he said that, more positively, “the resilience of the economy so far this year translates into an improved forecast for 2023.”
“The economy remains on track to avoid recession,” the report added.
However, higher interest rates will limit businesses’ appetite for spending in 2024, the forecast added. Those higher rates will also affect the housing market, with prices set to stagnate this year and fall 4 percent in 2024.
The forecast said the impact of higher borrowing costs was weighed against a boost to the economy from falling energy prices, easing supply chain pressures and a growing workforce.