The coming recession in the UK could be twice as bad as expected, say analysts | Economic growth (GDP)

The coming recession in the UK could be twice as bad as previously thought, according to leading economic forecasters at business consultancy EY.

Reduced government support, higher taxes and an overall worse outlook have led the company’s analysts to conclude that the next three years could be worse than they predicted three months ago.

In October, EY’s Item Club forecast a contraction in gross domestic product (GDP) of 0.3% this year, followed by growth of 2.4% next year and growth of 2.3% in 2025.

But an updated forecast released on Monday said GDP will fall by 0.7% this year, followed by growth of 1.9% and 2.2% in the next two years.

The downgrade contrasts with recently released economic data and an opinion from the World Economic Forum in Davos, which suggested that the global outlook is not as bleak as first feared. In recent weeks, the FTSE 100 has come close to all-time highs.

“The UK economic outlook turned gloomier than forecast in the autumn, and the UK may already be in what has been one of the most anticipated recessions in living memory,” said EY’s UK chairman, Hywel Ball.

Ball said that while the recession may cut deeper than previously thought, it will not necessarily last longer than earlier forecasts indicated.

EY said it was still unclear whether the country was already in recession – defined by two consecutive quarters of falling GDP. While the economy contracted in the third quarter of last year, GDP data released this month showed the economy unexpectedly grew by 0.1% in November, leading some economists to think the fourth quarter could be positive.

Despite this, EY said the UK is still expected to hit recession this year, shrinking during the first half of 2023, before returning to growth in the summer. A recession would likely prove less damaging to the economy than the recessions of the 1980s, 1990s and 2000s, it added.

“One positive thing is that, despite the recession being deeper than previously forecast, it won’t necessarily be longer,” Ball said. “The economy is still expected to return to growth during the second half of 2023 and has been spared any significant new external shocks in the past three months from energy prices, Covid-19 or geopolitics. Meanwhile, the main drag on activity over the past year – high and rising inflation – may be starting to recede, while energy prices are also falling.”

Economists forecast inflation to average 7.2% this year, including a big jump when the government’s energy support scheme becomes £500 less generous a year for the typical household from early April.

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