UK economy averts recession but long-term challenges remain, says CBI

Forecast describes a "tale of two halves" as inflation falls, but is still too high for household incomes.

The British economy is no longer expected to fall into mild recession this year. PA

The British economy is no longer expected to fall into mild recession this year, and could grow by 0.4 per cent in 2023, the Confederation of British Industries forecast on Monday.

This marks a turn from the CBI’s last forecast in December 2022, which predicted the UK economy would shrink by 0.4 per cent in 2023. Growth is expected to pick up to 1.8 per cent by 2024, a slight increase from the 1.6 per cent expected in the last forecast.

Falling inflation – in part driven by lower wholesale energy prices – and stronger global growth as China reopens its economy following the lifting of Covid-19 restrictions, were some of the contributing factors.

Households will continue to suffer from the cost of living crisis, and longer-term challenges to the economy remain, as business investments stagnate.

Alpesh Palesha, lead economist at CBI, described the latest forecast as a “tale of two halves”.

“We now expect a somewhat better outlook for growth […] this should translate into better, albeit still pretty weak, demand conditions,” he said.

“Despite a somewhat better growth outlook, this year will be another difficult one for households. Another year of high (albeit falling) inflation will weigh on real incomes, and put pressure on bottom lines for consumer-facing companies.”

He added: Furthermore, despite an upgrade to near-term GDP growth, our forecast expects little change in the longer-run challenges plaguing the UK economy.”

Food prices remained close to a 45-year high, despite falling by 8.7 per cent in April since their peak in October 2022. Inflation is also expected to outstrip wage growth, putting a strain on household incomes.

Two more interest rate rises from the Bank of England are forecast, bringing the “terminal rate” to 5 per cent.

Exports and business investment are underperforming and expected to remain flat this year, gaining “a firmer footing” in 2024. The decline in household incomes will also impact residential investments. Household spending is expected to recover by 2024, if it grows by 1.6 per cent.

“Despite this, the longer-term picture on private sector capital spending remains one of relative underperformance: it is broadly unchanged as a proportion of GDP over our forecast, considerably lagging the rest of the G7,” said the forecast.