A recession is still on the cards in the UK despite the economy performing better than the experts were warning just a few months ago, according to new forecasts. Higher interest rates and households responding to the cost of living crunch gripping their finances by trimming spending is tipped to push GDP 0.3 per cent lower this year, according to consultancy KPMG.
Families are being hit by the worst inflation surge in forty years and by the Bank of England (BoE) increasing borrowing costs to tame it. Bank governor Andrew Bailey and his team of economists increased rates for the eleventh time in a row at the end of March to 4.25 per cent a post-financial crisis high, as he stepped up the central bank’s fight against inflation.
KPMG reckons the BoE will keep rates at that level for the whole of this year, weighing on household and business spending. As a result, “although the likelihood of a UK recession has fallen it has not dissipated entirely” the firm said in its latest set of UK and global economic forecasts.
The Office for Budget Responsibility (OBR), Britain’s official forecaster, at chancellor Jeremy Hunt’s first budget in March raised its GDP forecasts for this year on the basis that households will raid their savings to maintain spending.
Back in November, BoE projected the UK was on course for the longest recession in a century. But now, despite the slightly better outlook, OBR chief Richard Hughes warned at the end of March in a TV interview that families in the UK are grappling with the biggest hit to their living standards since records began.
KPMG experts also said a slowdown in the housing market caused by higher mortgage rates freezing potential buyers out of a home purchase and weaker business investment will clamp down on economic growth. The UK is tipped to be the only G7 country to undergo an economic contraction this year. Growth is also poised to flatline in 2024, with GDP only bumping 0.6 per cent higher.
Separate numbers at the end of last month from consultancy PwC reveal UK household debt has topped £2 trillion for the first time on record, with risky borrowing up just over 7 per cent over the last year, showing families are turning to borrowing to fund spending amid the cost of living crisis.
The global economy is also not out of the woods as yet as it faces its darkest outlook for more than 30 years as geopolitical tensions and sky-high inflation take their toll, according to the head of the International Monetary Fund.
In a speech ahead of the fund’s spring meeting earlier this month, Kristalina Georgieva said output around the world would rise by an average of just 3 per cent a year for the next five years – the weakest projection since 1990 and well below the average annual growth of 3.8 per cent over the past two decades.
“With rising geopolitical tensions and still-high inflation, a robust recovery remains elusive,” said Georgieva.
“This harms the prospects of everyone, especially for the most vulnerable people and vulnerable countries.” She said over the past three years the global economy has been “climbing one great hill after another only to discover there are many more to come.” “First was Covid, then Russia’s invasion of Ukraine, inflation and a cost of living crisis that hit everyone,” she added.
“But the path ahead, and especially the path back to robust growth, is rough and foggy, and the ropes that hold us together may be weaker now than they were.”
Bank failures in Switzerland and the US exposed frailties that raised the downside risks for the global economy, she said. The fund predicts 90 per cent of advanced economies will see growth slow this year. (The writer is our foreign correspondent based in the UK)
Oman Observer is now on the WhatsApp channel. Click here
