According to leading economic researchers at management consultancy EY, the looming recession in Great Britain could be twice as bad as previously assumed.
Reduced government support, higher taxes and an overall worsening outlook have led the company’s analysts to conclude the next three years could be worse than they anticipated three months ago.
In October, EY’s Item Club had forecast gross domestic product (GDP) to contract by 0.3% this year, followed by 2.4% growth next year and a 2.3% increase in 2025.
However, an updated forecast released on Monday said GDP would fall by 0.7% this year, followed by growth of 1.9% and 2.2% over the next two years.
The downgrade comes at odds with recent economic data releases and sentiment at the World Economic Forum in Davos, which suggested the global outlook was not quite as bleak as first feared. In the past few weeks, the FTSE 100 has approached its all-time high.
“The economic outlook for the UK turned bleaker than forecast in the autumn and the UK may already be in one of the most anticipated recessions in living memory,” said Hywel Ball, EY UK Chair.
Ball said that while the recession could be deeper than previously thought, it would not necessarily last longer than previous forecasts indicated.
EY said it was still unclear whether the country was already in a recession – defined by two consecutive two-quarter GDP contractions. While the economy shrank in the third quarter of last year, GDP numbers released this month showed the economy expanded an unexpected 0.1% in November, leading some economists to believe the fourth quarter could be positive .
Despite this, EY said the UK will fall into recession later this year and contract in the first half of 2023 before returning to growth in the summer. The recession would also likely prove less damaging to the economy than the recessions of the 1980s, 1990s and 2000s, she added.
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“The only bright spot is that while the recession will be deeper than previously forecast, it won’t necessarily be longer,” Ball said spared from significant new external shocks from energy prices, Covid-19 or geopolitics. Meanwhile, the main headwind to last year’s activity – high and rising inflation – may begin to ease, while energy prices also fall.”
Economists are forecasting inflation to average 7.2% this year, including a big jump if the government’s energy support program becomes £500 a year less generous for the typical household from early April.
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