UK recession likely to be worse than feared, warns EY

The UK economy is facing a deeper recession than currently expected, economic forecasters at EY warned on Monday.

Publishing its Winter Forecast, the EY Item Club trimmed GDP expectations for both 2023 and 2024, citing tighter fiscal policy, high inflation, falling incomes and rising interest rates.

It now expects GDP to contract by 0.7% in 2023, from a previous forecast for a 0.3% reduction, and for it to grow by just 1.9% in the following year. The EY Item Club had previously expected GDP to strengthen by 2.4% in 2024.

Growth in 2025 is expected to be 2.2%, down marginally on a previous forecast for 2.3%.

Hywel Ball, EY UK chair, said: “The UK’s economic outlook has become gloomier than forecast in the autumn, and the UK may already be in what has been one of the most widely anticipated recessions in living memory.

“The one silver lining is that, despite being a deeper recession that previously forecast, it won’t necessarily be a longer one. The economy is still expected to return to growth in the second half of 2023 and has been spared any significant new external shocks in the last three months from energy prices, Covid-19 or geopolitics.”

However, the economy is still not expected to regain its pre-pandemic size until the middle of 2024, the forecast noted.

The EY Item Club expects inflation to average 7.2% this year, with unemployment peaking just below 5% and the current interest rate hiking cycle pausing in the spring at 4%.

Consumer spending is forecast to fall to 1.4% in 2023 before picking up again, with growth of 2.3% predicted for 2024.

Martin Beck, chief economic advisor to EY Item Club, said: “In theory, households drawing on the savings accumulated during the pandemic could help mitigate the impact on consumer consuming from high inflation, real wage reduction and job losses.

“However, the latest data signals some reluctance among consumers to do so, suggesting that for now, consumers are more concerned about their own financial prospects.

“But as the economic outlook brightens later this year, we think consumers will show a greater appetite to save less and borrow more.”