EY sees "reasons for optimism" as it upgrades UK GDP forecast for 2023

High interest rates will have an inevitable impact on UK GDP, but the economy should still be able to avoid a recession – that's according to experts at consultancy giant EY.

According to the EY Item Club's new Autumn Forecast out Monday, UK gross domestic product should expand by 0.6% in 2023, higher than the 0.4% forecast projected in July.

However, next year's expansion has been revised down from 0.8% to 0.7%, due to the lagged impact of the recent interest rate rising cycle as it continues to feed through. Nevertheless, the risk of a recession – defined by two consecutive quarters of negative growth – has reduced, experts said.

EY Item Club now expects inflation to ease to around 4.5% by the end of this year, lower than its previous 5% forecast, before falling to 2% in the second half of 2024. This compares with the latest reading of 6.7% for August 2023.

However, oil prices, frozen income tax thresholds, inflation and deteriorating conditions in the labour market will continue to put pressure on consumer spending, the consultancy said.

“The cost of debt is set to be the biggest headwind for the UK economy over the next 12 months, with consequences for both businesses and consumers," said EY UK chair Hywel Ball.

"But while high interest rates will weigh heavily on growth, there are still signs of resilience from which we can take positives. Inflation is heading in the right direction, average wages are rising in real terms once more, and household and corporate balance sheets remain unusually healthy."

Ball continued: “While the UK may have lagged some of its global peers in its economic recovery from the pandemic – despite upwards revisions to GDP data – this suggests there is room for catch-up growth. Most encouragingly, the recent strength of business investment, which had been disappointingly subdued for some time, perhaps signals that the economy’s growth potential may be reviving. There’s no getting away from the fact that growth will be limited in the short-term, but there are reasons for optimism for next year and beyond.”