Britain will dodge recession in 2023, think tank predicts

Global tech investors continue to put their faith in London, with latest end of year VC investment figures from Dealroom and London & Partners showing that the UK capital’s tech firms raised an impressive $19.8bn last year.

A think tank has forecast that Britain will avoid a technical recession not only in the final three months of 2022 but throughout 2023.

The economy will grow by 0.2 per cent this year, according to the latest prediction by the National Institute of Economic and Social Research. Its expectation of mild growth in each quarter suggests the country will not meet the criteria of two consecutive three-month periods of negative growth needed to count as a recession.

It is a more optimistic outlook for the economy than that offered by the Bank of England last week, which predicted a shallower but still protracted recession, as well as the recent gloomy forecast from the International Monetary Fund (IMF), which said Britain would be the only leading economy to suffer a contraction this year.

The institute’s figures are markedly more positive than the 0.5 per cent contraction expected by the Bank of England and the 0.6 per cent decline projected by the IMF. The think tank said forecasts for this year appear more negative because of Britain’s relatively strong performance last year. Growth is calculated by comparing output in the most recent period with the same period a year before, so a strong base level distorts later figures.

The economy is thought to have exceeded expectations with 4.1 per cent annual growth in gross domestic product, the main measure of output, in 2022, compared with 3.1 per cent expected for the world economy. The institute expects global growth to fall to 2.3 per cent this year because of the impact of the war in Ukraine.

It expects a moderate rise in UK unemployment, from 3.7 per cent to an average of 4.4 per cent this year, with a peak of 4.7 per cent in the third quarter. This is below the central bank’s expectation of a peak at 5.3 per cent.

Leaza McSorley, senior research manager for macroeconomics at the institute, warned: “While the economy seems unlikely to fall into a protracted contraction, the risks are skewed on the downside, with a higher Bank [interest] rate and some withdrawal of fiscal support likely to bear down on activity over the course of 2023 and 2024.”

She said the biggest risk to the forecast was household disposable income, because it had contracted for four consecutive quarters, despite cost of living payments from the government to help with energy costs and pay rises averaging about 6 per cent.

Pay rises in the private sector have risen to near-record highs but still lag inflation, eroding the value of pay packets. The think tank expects inflation, which is in double digits, to fall to 3.2 per cent by winter next year, meeting the Bank of England’s 2 per cent target in late 2025.

“Disposable income is where the real squeeze and risks may come,” McSorley said. “We expect a very slight increase in 2023, but this depends on the timing at which inflation slows, interest rates stabilise and if government support with energy bills is withdrawn or tapered beyond April.”

However, even though the forecasts indicate Britain may avoid recession, the cost of living crisis will exacerbate regional inequalities and income disparity. Adrian Pabst, the institute’s deputy director for public policy, said: “Low-income households have seen their disposable income fall by nearly 20 per cent since the onset of Covid.”