Inflation tipped to push UK economy into recession

Britain’s central bank policymakers are “duty bound” when they meet this week to push the UK into recession to cap rising inflation, a former Bank of England (BoE) official has said.

The UK economy is at significant risk of entering a “mild recession” next year as soaring inflation takes its toll, according to KPMG.

GDP growth is forecast to more than halve to 3.2 per cent this year, from 7.4 per cent in 2021, and fall to 0.7 per cent in 2023, according to KPMG’s UK Economic Outlook report.

“The cost of living crisis and rising tax burden have led to a fall in consumer confidence which is set to drag on spending,” economists at the accounting firm said. “Business investment is expected to be weak next year without government support.”

KPMG warned that the risks to its forecast were “skewed to the downside”, and that “a sharper deterioration in the external environment — causing recession for major UK trading partners — coupled with a stronger fall in consumer spending, could see the UK entering a mild recession next year”. This could lead to a 1.5 per cent fall in GDP between the third quarter this year and the third quarter of 2023.

The UK economy has only just returned to its pre-pandemic size after a 9.3 per cent drop in GDP in 2020 because of Covid-19. However soaring commodity prices, compounded by Russia’s invasion of Ukraine, and lockdowns in China that are disrupting supply chains, pose fresh threats. Household incomes are set to fall by 0.8 per cent because of inflation, which KPMG expects to average 8.1 per cent this year.