The UK is braced for some dismal economic data this week, as well as a possible rise in interest rates from the Bank of England.
But economists will be looking for the slightest signs that the worse may be over and that there may be some extremely dull light far down the end of a long tunnel.
That tiny glimmer of light is a forecast that inflation might have reached its summit, the Bank of England might be less hawkish on interest rates than they were last month and the recovery of the pound to levels last seen in the summer.
On Monday, the latest GDP figures are likely to give more evidence to the assertion that Britain is already in recession.
A quarterly forecast from a Reuters poll of economists suggested the UK economy shrank 0.2% last quarter, from July to September, and will do so by 0.4% in this one, meeting the technical definition of recession.
It will then contract 0.4%, 0.4% and 0.2% in the first three quarters of next year, meaning that while the predicted recession will be shallow, it will be far longer than has been historically the case.
Paul Dales at Capital Economics said that “2023 will be a tough year for the economy as the effects of the previous rises in inflation and previous hikes in interest rates are felt”.
“The good news is that we think the recession will end in the second half of 2023 and a gradual fall in inflation will probably allow the Bank of England to inject more vigour into the recovery by cutting interest rates in 2024.” he added.
Alpesh Paleja, lead economist at the Confederation of British Industry said: “While it’s some consolation that the coming recession will be shallow, it’s concerning that longer-term weakness in productivity and business investment appears to be bedding in.
“It does not bode well for living standards and the economy’s capacity to grow over the longer-term.”
Unemployment and recession
Considering the UK economy seems to have started its slide into recession and by some predictions might already be in one, unemployment numbers have remained remarkably subdued.
On Tuesday, the Office for National Statistics will release the latest data on UK's labour market, and while a very modest increase from the three months to September figure of 3.6 per cent for the unemployment rate is expected, a drastic jump is not.
As 40,000 rail workers go out on strike next week, to be joined by nurses and postal workers, the wage growth figures will be closely scrutinised. Regular pay in the three months to September rose by 5.7 per cent.
“That pay growth figure offers some grounds for encouragement for workers, but it still lagged inflation,” said Russ Mould, investment director at AJ Bell.
Economists will be keeping a close eye on the UK's latest inflation numbers due out on Wednesday.
At 11.1 per cent, inflation was running at a 41-year high in October, but many analysts feel that may be its peak. While the rate of inflation is not expected to come down rapidly, the November figure is forecast to be around 10.9 per cent.
The slight drop will come as scant relief to the millions in the UK suffering through freezing temperatures and soaring energy and food prices.
The CBI does expect inflation to drop to anything near the Bank of England's 2 per cent target within the next year. By the end of 2023, the business group is predicting inflation to be at 3.9 per cent.
“This means that the squeeze on households seen this year persists into 2023, leading to a year-long decline in consumer spending,” the CBI said.
Bank of England decision
Next week is a big week for central banks and the UK is no exception. The US Federal Reserve announces its latest decision on interest rates on Wednesday, with the European Central Bank, the Swiss National Bank and the Bank of England all having their rate announcements on Thursday.
Currently, UK interest rates are at 3 per cent, but it is widely expected that the Bank of England will raise them again by at least 0.5 per cent. In November, the Bank's Monetary Policy Committee raised rates by 0.75 per cent.
Interest rates have risen sharply over the past year. In December 2021, the Bank of England abandoned its ultra-low interest policy and increased rates to 0.25 per cent. On Thursday they could 3.25 per cent higher than that.
All but two in a Reuters poll of 54 economists expect a 0.5 per cent rise in UK interest rates on Thursday.
“Almost a year to the day after the Bank of England began this tightening cycle, it looks set to deliver another Christmas hike,” said Elizabeth Martins at HSBC.
“We think it will be a 50 basis point (0.5 per cent) rise, taking Bank Rate to 3.50 per cent, with risks weighted towards a larger 75 basis point move, rather than a smaller 25 basis point one.” she added.
Nonetheless, with a long and shallow recession predicted ahead, the Bank of England will not want to overdo interest rate rises and risk slowing economic growth further, even given that inflation will remain stubborn high for at least six months.
While the Bank's interest rate rises will take some time to dampen down inflation, they are having a more stabilising effect on the British pound.
The British currency plunged after former prime minister Liz Truss's plans for the UK economy. Even though it had been falling against the US dollar for some time, it plunged in late September to an all-time low against the US currency at $1.0382.
There was talk among currency traders and economists of the pound reaching parity with the dollar.
But by December 5, the pound was back up to $1.2345 against the greenback, its highest level since mid-June.