UK ‘set to avoid recession’ but interest rates to take toll

Britain’s economy is to grow more quickly than previously thought this year – but will find it hard to pick up speed in 2024 due to the delayed impact of rate hikes, a forecast warns.

The report from EY ITEM Club predicts that the UK economy will grow by 0.4 per cent in 2023, up from its previous estimate in April of only 0.2 per cent growth.

But the outlook for the next couple of years has darkened according to the forecaster – which uses the UK Treasury’s model. It expects the economy will grow by just 0.8 per cent in 2024 – down from a previously forecast 1.9 per cent – and by 1.7 per cent in 2025, down from 2.3 per cent.

Meanwhile the stubbornness of inflation means that it will not be until 2025 – rather than a previously thought 2024 – that annual wage growth finally outstrips annual average inflation.

This suggests that the value of pay packets will keep falling in real terms until then.

It means many voters may not start to feel an improvement in their finances until after next year’s General Election.

Hywel Ball, of EY, said: ‘The economy is moving past the series of shocks which have buffeted it in recent years, but their repercussions are long lasting and holding back UK growth.’

It comes after figures last week showing a bigger-than-expected fall in inflation in June gave hope to consumers wrestling with the cost of living squeeze.

It also offered a light at the end of the tunnel for borrowers – that interest rates may not have to go up by as much as feared.

The EY ITEM Club report reflected the fact that inflation has proven more stubborn than when it issued its last forecast in April – meaning interest rates will also remain higher for longer.

But it said that more positively ‘the economy’s resilience so far this year translates into an upgraded forecast for 2023’.

‘The economy remains on course to avoid recession,’ the report added.

However, higher interest rates will limit firms’ appetite to spend in 2024, the forecast added. Those higher rates will also take their toll on the housing market, with prices set to stagnate this year and drop by 4 per cent in 2024.

The forecast said the impact of higher borrowing costs was set against the boost to the economy from falling energy prices, easing supply chain pressures and a growing workforce.