How deep UK Recession will be in 2023

The United Kingdom (UK) will face recession. Many people are worried and fearing about recession. How deep this recession is going to be and what are the steps government has taken so far? Let us try to find out through this article.

UK’s GDP, and Unemployment

There was a fear of recession in UK before the release of GDP data in November. Last year UK contracted for three quarters. The Fourth Quarter data, where many economists and experts thought will also show decline in economic activity, surprised by the data as it showed slight growth. Thanks to World Cup Football which boosted this growth! Yes, as there was extra spending on food and drinks during the world cup there was rise in GDP.

Based on the November, 2022, GDP data Consumers and Business are confident of the economy to move forward. But, one cannot go with Monthly GDP data as they are mostly erratic and not convincing enough to know an economic activities. Recession fears are around still for many as the energy prices are still concern.

There is a squeeze in real income, rise in interest rates, and fall in house prices, which all depends on consumption and investment. Taking the economy into a recession for over a year from the third quarter of 2022, where the peak-to-trough fall in GDP by 2 per cent.

The Economic and Fiscal Outlook of Outlook of Office of Budget Responsibility (OBR) GDP is expected to fall by 1.4 per cent in 2023. The potential output was expected to increase by 3.1 per cent by end of the year.

Without Energy Price Guarantee (EPG) – the fiscal support to households and businesses – the recession may be 1.1 per cent deeper, with a peak-to-through fall in GDP of 3.2 per cent and the through in output gap of 0.5 per cent deeper.

According to Economic and Fiscal Outlook (EFO) of OBR unemployment rate dropping to 3.5 per cent in the three months to August – this is lowest since January, 1974. However, there are more vacancies and surveys are also showing continued difficulties recruitment.

Unemployment is expected to raise from 3.5 percent to the peak of 4.9 percent in the third quarter of 2024.

Inflation in UK

The EFO of OBR stated that the CPI inflation is set to reach 41-year high at 11 percent in the current quarter. This would have reached peak by further 2½ percent without Energy Price Guarantee (EPG), limiting a typical household energy bill to £2,500 this winter and £3,000 next winter. 

Inflation erodes living standards along with real wages are reduced by 7 per cent in total over the two financial years to 2023-24 – wiping out the previous eight years growth. This may occur despite over £100 billion of additional government support.

Source:  Office for National Statistics – Consumer price inflation

Many economists and experts expect that the inflation may gradually come down later this year. However, the household expenditure and prices may still stay high due to Energy bill and this will be high despite the EPG.

Government Borrowing

Since March, the Fiscal policy was very much active in full force. This is visible with five major fiscal policy statements by three successive governments. The main three policy measures are

• Government will provide near-term support costing £86.4 billion total for next two years i.e., 2022-23 and 2023-24. This is to support households and business with their energy bills on 26 May and 8 September, 2022.
• Reducing medium-term personal and corporate tax in 23 September, 2022, growth plan. This was at a cost of £48.2 billion in 2027-28. Out this £48.2 billion – £21.1 billion was subsequently cancelled via announcements on 3 and 17 October, 2022. Still the remaining amount of £27.1 billion. and
• In the Autumn Statement, it is mentioned that fiscal medium-term tightening which raises from £ 19.3 Billion in 2024-25 plus material sums thereafter, raised to £ 61.7 billion.

These measures increases the borrowing of the Government by £ 64.2 billion in 2022-23 and £ 39.8 billion 2023-25. This will help to reduce the fall in output while the economy is in recession and increase in unemployment.

How deep will be UK Recession? – Summary from Reports

From the above measures and projections, it is clearly visible that the Government is taking steps to avoid deep impact of recession. However, the Goldman Sachs in its Macro Outlook 2023, stated that “the UK are probably in recession, mainly because of the real income hit from surging energy bills.”

The report also stated that “To regain credibility with the financial markets, the Rishi Sunak government was forced to propose a new budget that was the exact opposite of its predecessor, featuring tax increases and spending cuts. In fact, this new plan is set to improve public finances by around 2.5% of GDP by 2027. Although many of these measures are backend loaded, they nonetheless leave less room for fiscal stimulus in 2023.”

The following table is from Macro Outlook 2023 of Goldman Sachs

According to KPMG research the UK’s recession could last until end of 2023 and can see the output fall by 1.9%. It also states that the recession may reduce purchasing power of households due to higher inflation and interest rates. KPMG also stated that the labour market will see the unemployment rate reaching 5.6% with deterioration from the first half of 2023. The end of tightening cycle by the Bank of England, with the Base interest rate to reach 4% by spring next year. After which, BOE will follow wait and watch approach when inflation gradually eases.

The Real GDP is expected to be -1.3 per cent in 2023 and also expected marginal growth of 0.2 per cent in 2024. The following table is KPMG’s forecasts for the UK.

Conclusion

There are many reports even claims that the UK recession may be as deep as Russia. UK has avoided recession for time being.  But, it may have recession again this year. How deep it is going to be that one has to wait and watch. Why it is so – one may ask. It is because the economic activities also depends on many external factors along with the policies (both Fiscal and Monetary) of Government. No one can say how economy will respond for any policy measures. Therefore, one cannot say so easily that how deep the recession will be.