The UK economic outlook for this year has improved, with analysts predicting a smaller-than-previous fall in production on the back of falling energy prices and better-than-expected business and consumer sentiment.
In December and January, economists expected gross domestic product to fall by 1 percent this year, according to data from Consensus Economics, which surveyed leading forecasters.
However, data for the week of February 20 shows economists are raising their forecasts. The average forecast is for GDP to fall by 0.6 percent in 2023.
The UK posted better economic news last week. The latest S&P Global/Cips Flash Composite PMI showed that UK business activity rebounded in February after six months of contracting production.
According to the GfK research group, consumer confidence reached its highest level in almost a year in February. And official data on public finances showed Chancellor Jeremy Hunt was on track to hit a £30bn windfall after the UK posted a surprise surplus in January.
While the cost-of-living crisis is far from over and the Bank of England could raise interest rates further to curb inflation, wholesale energy prices have fallen sharply, having surged after Russia invaded Ukraine in February last year.
The wholesale gas price in the UK is now below £1.30 a year, half the price of mid-December and below a peak of £5.95 last August.
Liz Martins, economist at HSBC, said with better economic news and falling energy prices “it is now plausible that there is no recession at all”.
“That would be a remarkable result given the scale of the energy shock and monetary tightening that we’ve had,” she added.
Allan Monks, an economist at JPMorgan, estimates the economy will grow 0.4 percent this year, partly due to lower energy prices.
Ellie Henderson, economist at Investec, said, “The drop in energy prices is sunshine on a cloudy day” for the economy because it has eased the pressure on businesses and households.
Lower wholesale gas prices mean the government’s ceiling on household energy bills has become more favorable to ministers.
It has fueled expectations that Chancellor Jeremy Hunt may not proceed with plans to raise the cap from its current annual level of £2,500 to £3,000 in April.
Susannah Streeter, an analyst at Hargreaves Lansdown, said the drop in gas prices should mean “an easing of input price punishment for companies, which should allow them to limit the increases passed on to customers”.
More than three-quarters of business leaders are confident about their companies’ prospects in 2023, according to a new survey released by the Boston Consulting Group.
Some analysts, including Citigroup, expect inflation to return to the BoE’s 2% target in the second half of 2023. The central bank expects inflation of 4 percent in the fourth quarter.
Monks predicts the unemployment rate will stabilize at around 3.7 percent, rather than rising as previously expected. This “would mean aggregate household real incomes could do better this year,” he said.
Victoria Clarke, Economist at Santander CIB, expects “a return to positive real wage growth in the second half of the year, which should support fiscal spending and economic momentum”.
However, the economy still faces a lot of headwinds, not least because higher interest rates have yet to fully impact consumers and businesses.
Streeter said demand could dry up in the economy as more homeowners and businesses face sharply higher borrowing costs.
“So a milder recession still cannot be ruled out and we are at least heading towards a period of stagnation in the early noughties,” she added.
Additional reporting by Daniel Thomas
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