Higher interest rates and increased unemployment will cause the UK economy to experience “stuttering growth” over the next two years, a think tank has said.
The economy will avoid a recession – defined by two or more quarters of falling gross domestic product (GDP) in a row – in 2023 but there is still a “60 per cent risk” of a recession at the end of 2024, the National Institute of Economic and Social Research (Niesr) said in a report.
UK GDP will increase by 0.4 per cent in 2023, representing a marginal improvement on its previous forecast in May, the think tank predicted.
But Niesr also downgraded predictions of 0.6 per cent growth next year down to 0.3 per cent after pressure from higher-than-expected borrowing costs.
As a result, the think tank has predicted it will be another year until UK GDP recovers to where it was before the coronavirus pandemic in early 2020.
It said higher interest rates, which it expects will peak at 5.5 per cent, will weigh on growth prospects.
“The triple supply shocks of Brexit, Covid and the Russian invasion of Ukraine, together with the monetary tightening that has been necessary to bring inflation down, have badly affected the UK economy,” Stephen Millard, deputy director for macroeconomic modelling and forecasting at Niesr, said.
“As a result, we expect stuttering growth over the next two years and GDP to only recover to its 2019 fourth quarter level in the third quarter of 2024.
“The need to address the UK’s poor growth performance remains the key challenge facing policymakers as we approach the next election.”
Inflation around the world – in pictures
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People queue to buy wheat flour at government-controlled prices in Islamabad. Pakistan's economy has been hit hard by a political crisis, as well as devastating floods and the global energy crisis, with the rupee plummeting and inflation at decades-high levels. AFP -
A market in Rio de Janeiro. Brazil's inflation ended 2022 with a sharp slowdown from double-digit peaks seen throughout the year. Reuters -
A market in Istanbul. Turkey's inflation at the end of 2022 stood at 64. 27 per cent, the country's Statistical Institute said, while the independent group of inflation researchers ENAG calculated it at 137. 55 per cent. EPA -
A Walmart in New Jersey. According to a poll, US Republicans and Democrats have distinct views of what’s most important for the government to address amid high inflation. More Republicans name gas and food prices, energy and immigration, while Democrats focus on health care, climate change and poverty. AP -
A used car sales lot in California. US Federal Reserve officials have indicated it’s possibly too early to declare victory over inflation. AFP -
A person walks by a sign showing interest rates at a bank in New York. EPA -
A woman walks with purchases past a store in Berlin. In December, consumer price growth across the Euro zone slowed to 9.2 per cent from 10.1 per cent a month earlier, Eurostat data showed last week. AP -
Workers sit in front of a banner reading "Stop the Inflation Monster" at the Burchardkai Container Terminal as they go on strike for higher wages at the harbour in Hamburg, Germany. Reuters -
Price tags at a market in Nice, France. Reuters -
Commuters cross Waterloo Bridge in London. The British Retail Consortium said spending in store chains rose by 6.9 per cent in annual terms in December, but this was a long way off consumer price inflation, which hit 10.7 per cent in November. Reuters -
Jobseekers in Johannesburg. South Africa’s governing party wants the central bank’s mandate broadened to shore up the economy and promote employment in addition to its existing task of tackling inflation. Reuters -
Social grant recipients stand in a queue outside a post office, as joblessness takes its toll in Meadowlands, South Africa. Reuters
The report said that rises in borrowing costs, persistent inflation, and a projected rise in unemployment will widen inequality.
Niesr said the poorest will suffer a 17 per cent shortfall in their disposable incomes in 2024 compared with five years earlier, while the richest households will take a 5 per cent hit.
Food and energy price rises have put poor Britons under pressure.
The latest forecasts have shown a slight improvement in inflation projections, with Consumer Prices Index inflation set to drop to 5.2 per cent by the end of 2023, narrowly meeting Prime Minister Rishi Sunak’s pledge to halve inflation this year.
Niesr has predicted that inflation will continue to ease, but slower than predicted, with inflation to fall to 3.9 per cent by the end of 2024 and fall to the Bank of England’s 2 per cent target by 2025.
Wages are expected to grow ahead of inflation next year in a boost to many households, the report said.
However, Niesr also predicted that unemployment will rise significantly over the next two years.
The unemployment rate – which was most recently recorded at 4 per cent for the three months to May – is set to be 4.1 per cent for this year, rising to 4.7 per cent in 2024 and 5.1 per cent for 2025, according to the forecasts.
“The aggregate shocks to the UK economy have widened disparities of income and wealth across the household distribution and between prosperous and poor parts of the country,” Adrian Pabst, deputy director for public policy at Niesr, said.
“The increasing inequalities facing poorer families are reflected in slower wage growth and fast-rising unsecured debt.
“For some of the poorest in society, coping with low or no real wage growth and persistent inflation has involved new debt to pay for permanently higher housing, energy and food costs.”
