Introduction to the 2023 UK Economy
The year 2023 is expected to be a challenging one for the UK economy, with a recession that will likely be deeper than the one experienced in the early 1990s. The combination of rising interest rates and soaring inflation will lead to a squeeze on household real incomes, making it difficult for consumers to spend. In this article, we will explore the factors that will contribute to this recession, its impact on the labour market, inflation, and the policy considerations that will shape the economy.
The Recession: A Year-Long Contraction
The UK is almost certainly already in a year-long recession, which will probably prove to be deeper than that experienced in the early 1990s. We expect a peak-to-trough fall in GDP of around 2.5%, which would be slightly smaller than the early 1990s recession and significantly less than the Global Financial Crisis. The recession will be driven by a combination of factors, including rising interest rates, soaring inflation, and a squeeze on household real incomes.
Impact on the Labour Market
The recession will inevitably cause unemployment to rise, with the unemployment rate expected to increase from 3.6% to around 5% by the end of 2023. This will entail job losses of about 200,000, with the hospitality and retail sectors likely to bear the greatest losses. However, the labour market is expected to loosen only slightly, with the level of vacancies falling from near-record levels to below 1 million. The exceptionally tight labour market will likely lead to firms hoarding labour, rather than shedding staff, which will limit the increase in unemployment.
Inflation: Slowing but Still Elevated
Inflation will remain high for most of 2023, with the CPI inflation rate expected to average around 7.5% over the whole of the year. However, the recession will go some way to reducing domestic inflationary pressures, and we expect inflation to fall to around 4.0% by the end of 2023. The Bank of England will continue to push interest rates higher in the near term, with a peak policy rate of 4.50% expected by June 2023.
Policy Considerations
The £55bn package of austerity measures announced in the Autumn Statement will not harm growth in the short term, as the pain has been delayed until after the next general election. However, the big contractions in spending scheduled from 2025 could depress the recovery. The central bank will continue to prioritize inflation control, and we doubt that the Monetary Policy Committee (MPC) will be comfortable cutting rates until it’s clear that core inflation is falling sharply towards the 2% target.
Conclusion
In conclusion, the 2023 UK economy will be shaped by a combination of factors, including rising interest rates, soaring inflation, and a squeeze on household real incomes. The recession will lead to job losses and a loosening of the labour market, while inflation will remain high for most of the year. The policy considerations will prioritize inflation control, with the central bank expected to keep interest rates high until the inflation rate falls sharply. Overall, 2023 will be a challenging year for the UK economy, and consumers and businesses will need to adapt to the new economic reality.
