The UK will dodge a recession this year but a tight labour market and sticky inflation will choke off growth, according to the latest economic forecast from KPMG.
Wonks at the Big Four firm have predicted that the UK will eke out growth of 0.3 per cent in 2023 but warned the UK faced a number of threats which could prolong a period of “lacklustre” economic performance.
The ongoing stickiness of UK inflation, recent tensions in the banking system, the uncertain impact of such rapid rise in interest rates on the economy, and worsening geopolitical tensions could all threaten to tip the UK into a recession.
“We’ve seen a slightly stronger momentum for the UK economy but risks are still elevated on the downside,” said Yael Selfin, chief economist at KPMG UK. “A stickier inflation will see monetary policy tightening even further, increasing the risk of unwelcome side effects among other potential headwinds.”
KPMG said the growth was weak by historical standards and some threats to the economy were yet to be fully uncovered.
A forecast from the British Chambers of Commerce last week similarly predicted that growth in the economy would “flatline” but the UK would dodge a technical recession this year, as had been widely predicted in 2022.
Inflation in the UK has proved more stubborn than economists expected. The latest reading in May dipped into single figures for the first time in nearly a year but topped predictions after a jump in core inflation, which excludes volatile food and energy prices.
KPMG said elevated core inflation, services price inflation, and pay growth all point to a “more persistent underlying price pressure”, which may keep interest rates at elevated levels.
“Although inflation is set to continue to fall in the near term, borrowing costs will likely remain higher for longer, depressing activity,” KPMG forecast.
They are predicting that rate-setters at the Bank of England will lift rates to a peak of 5.25 per cent this year.