UK economy to remain weak to late 2023, industry warned

The outlook for the UK economy has improved since late last year, but economists still forecast a recession through most of 2023.

KPMG chief economist Yael Selfin told the Abta Travel Finance Conference in London: “Inflation probably peaked in the autumn and is expected to fall quickly through 2023-24, with the big rise in energy prices last year coming out [of the figures]. But food prices are still rising so it won’t be plain sailing.”

However, Selfin said: “We expect inflation to hover around 2% from 2024.”

She added: “Real disposable income fell significantly, [but] we expect wages to continue rising quite strongly while inflation will go down. Purchasing power is expected to be restored gradually.

“The squeeze from a steep rise in interest rates is mostly done. We expect one more 0.25% rise, then a pause while the Bank of England waits to see inflation reduce.

“That is the good news. There are two pieces of bad news. One is that the impact of higher interest rates has not fully fed through yet. Second, we don’t expect interest rates to go back to the level of before.

“Interest rates will remain higher, probably at 2% to 3%. A lot of mortgage holders are going to be impacted.”

Selfin warned: “In the UK we’re particularly exposed because the majority have fixed-rate mortgages for periods of two to five years.

“About half of households will have to re-mortgage and that has implications for the housing market. Purchasing power will rise, but a proportion will go on increased mortgages.

“We expect house prices to fall around 8% and that will impact consumer confidence.”

She forecast “a series of relatively weak economic quarters until the fourth quarter of 2023”, with the economy contracting “about 1%, then a weak pick-up in 2024 with growth of about 0.4%”, adding: “We don’t expect much momentum in the economy.

“Part of the reason is very weak business investment since 2016. Investment is nowhere near the trend level, and business investment is one of the key drivers of productivity.

“Also, we’ve seen relatively weak exports, which may be related to Brexit. We may see an improvement there with the efforts to improve UK-EU relations.”

Yet Selfin noted: “There is a very tight labour market. You might not find the workers you want, but people will be able to find jobs. That is why we don’t expect a major UK recession.”

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