There are growing fears that policy measures to fight inflation, if combined with further fallout from geopolitical tensions, could trigger another recession.
KPMG has also developed an alternative scenario to capture some of the downside risks. Forecast models show that a sharper deterioration in the external environment causing a recession in some of the UK’s main trading partners, together with a sharper drop in domestic consumer spending, could see the UK economy enter into a mild recession next year, with a 1.5% drop in GDP in the year between Q3 2022 (Q3) and Q3 2023.
As the invasion of Ukraine and further lockdowns in China put upward pressure on commodity prices and keep supply chains under strain, UK GDP growth is expected to slow to 3.2% this year and could fall further to 0.7% in 2023, according to KPMG. . Political actions to fight inflation, if combined with geopolitical tensions, could lead to another recession.
Yael Selfin, Chief Economist at KPMG UKcommented on the report: “We expect growing external headwinds and weakening domestic momentum to see economic growth slow significantly over the next year, with a significant risk of a mild recession. .
“Manufacturing and financials appear to be among the hardest hit sectors in our downside scenario. The manufacturing sector could fall by 5.1% in 2023 and 2.8% in 2024, as the sector tends to be more export-oriented, while financial services could also suffer significant losses in the event of a slowdown, as it increases the potential for major loan losses and write-offs, with production down 8.8% and 2.5% over the next two years.
Household budgets are under pressure as persistently high inflation erodes consumers’ purchasing power. Although the support measures announced by the government have helped to mitigate the expected impact of the increase in energy bills for the lowest income households, overall household income is expected to fall by 0.8% in terms of real this year and 0.5% in 2023, according to the report. .
KPMG’s new forecast foresees average inflation over 2022 revised to 8.1%, compared to 7.9% in its previous report. Peak inflation in the UK is likely to be lower than in some of the other major economies. Due to the revised regulated energy prices in October, the full impact on UK inflation is unlikely to materialize until the autumn, with the outlook still heavily dependent on future energy price developments. big gas. Inflation will then start to normalize from Q2 2023 and return to the Bank of England’s 2% target in Q2 2024.
The Bank of England has now raised interest rates in five consecutive policy meetings since December 2021, taking the bank rate to 1.25%. However, rates are only expected to reach 1.75% by the end of 2022, with a pause in the tightening cycle thereafter to prevent inflation from falling well below the 2% target at middle term.
Selfin concluded: “We expect supply issues to gradually ease over the course of this year, although headwinds in the form of a potential deterioration in Russian energy supply or further blockages in China due to its zero COVID policy could worsen the outlook. Combined with pressures on household budgets, the Monetary Policy Committee will have to weigh the risk of high inflation impacting wage growth against the risk of a recession. Faced with such a compromise, we think it is likely that the doves of the Committee could tip the scales towards a more gradual rise than what is currently expected by the markets.
Fibre2Fashion (KD) News Desk