UK’s economy is set to shrink 0.4% in 2023 as inflation remains high
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The economy of the United Kingdom is set to shrink by 0.4% in 2023 amid a notable increase in inflation. The rising inflation levels have resulted in companies in the country placing their investments on hold, which paints a gloomy picture of the country’s growth in the coming year.
UK economy to shrink 0.4% next year
A forecast by the Confederation of Business Industry forecast on Monday shared its projections saying that the UK was in “stagflation” amid a rise in inflation and declining productivity and business investments. While there were clear growth opportunities, firms hesitated to invest in 2023.
The CBI Director-General, Tony Danker, commented on this, saying, “We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity.”
The forecast made by the CBI is in sharp contrast to the forecast that was made in June. At the time, the company predicted that the economy would grow by 1% in 2023. Moreover, the company does not expect the gross domestic product to return to its levels before the COVID pandemic hit. A strong recovery will not be seen until mid-2024.
One of the adverse effects on the UK economy is the rising gas prices following the Russia-Ukraine war. Moreover, the challenges facing the labor market have further dampened the prospects of economic recovery after the pandemic. Weak investment and declining productivity are the other factors contributing to the gloomy outlook.
The CBI also expects that by late 2023 and early 2024, the unemployment rate will peak at 5%. This will notably increase from the current unemployment rate of 3.6%.
In October, UK’s inflation rate reached a 41-year high of 11.1%. This strained consumer demand. The CBI predicts that inflation will decline slowly, averaging 6.7% in 2023 before dropping to 2.9% in 2024.
The CBI further anticipates that by the end of 2024, business investment in the UK will be 9% below the levels before the pandemic. The output per worker will also decline by 2%.
The CBI has also called upon the government to ensure more flexibility in the work visa system after Brexit. It has also recommended that the government lift the ban on the construction of onshore wind turbines and ensure better tax incentives for investment.
Other forecasts show slow economic growth
The forecasts made by the CBI are more favorable than what the Office for Budget Responsibility forecast last month. The department predicted that the UK economy would decline by 1.4% in 2023.
On the other hand, the CBI forecast is nearly the same as what has been forecast by the Organization for Economic Co-operation and Development (OECD). This organization expects the UK to be the worst-performing economy in Europe apart from Russia by next year.