Britain’s economy is expected to take until 2024 to recover to pre-Covid levels amid a slowdown for hiring and business investment, as households and businesses struggle with soaring costs.
Business leaders have said that there has been a significant decline of key economic indicators in recent weeks, with confidence among company bosses over the growth outlook collapsing to the lowest level since the depths of the Covid crisis.
In a downbeat assessment, analysts at Deutsche Bank said UK GDP was due to take until 2024 to return to the level of December 2019 before the pandemic struck, raising the prospect of limited economic progress being made by the time of the next election.
Liz Truss used her speech to the Conservative party conference in Birmingham to argue her government would prioritise “growth, growth, growth” while attacking what she called an “anti-growth coalition” that could hold the country back.
The prime minister said she wanted to break a “high-tax, low-growth cycle” by offering lower taxes and scrapping regulations to encourage households to spend and companies to invest in the UK economy.
However, the promise to reboot growth comes at a difficult moment, with official figures showing the economy remained 0.2% smaller than pre-Covid levels at the end of June. With soaring energy prices and weaker global growth since Russia’s war in Ukraine began, the Bank of England has said the economy is close to recession and on course for limited progress next year.
Highlighting the risks to the economy with inflation at a 40-year high, the British Chambers of Commerce (BCC) said more than three-quarters of companies in a survey of 5,200 firms had not increased investment in the last three months.
It said there had been a sharp drop in business confidence in the past quarter, in a study carried out before the government announced its energy support package and mini-budget plans. As many as four in 10 firms said they thought their profitability would fall in the next 12 months.
Shevaun Haviland, the director general of the BCC, said that, while the government’s support measures were welcome, ministers urgently needed to present more detail on how their policies would support firms to expand.
“Our findings paint a worrying picture of the state of affairs at many UK firms. Almost every key business indicator is trending downwards – sounding alarm bells across all sectors and regions,” she said.
Separate figures from the Recruitment and Employment Confederation and the accountancy firm KPMG showed a further slowdown in hiring activity among employers to the weakest rates since the final nationwide Covid lockdown in early 2021.
Claire Warnes, head of education, skills and productivity at KPMG UK, said: “Deepening economic uncertainty has also meant that workers are choosing to stay put in current roles, rather than apply for new roles, leading to a moderation in the overall rate of vacancy growth.”
Deutsche Bank said the government’s tax cuts and energy support scheme would help to add about 0.5 percentage points to UK GDP over the next year relative to its previous forecasts. However, higher interest rates from the Bank of England would shave off close to 0.8 percentage points from GDP relative to its previous estimates.
Sanjay Raja, a senior economist at Deutsche, said: “Tighter financial conditions … will offset much of [the] gains in fiscal policy. Household spending and business investment are likely to track a little lower than we previously anticipated, especially with unemployment expected to rise from next year.”
He said UK GDP growth was now forecast to slow to 3.5% this year, compared with a previous estimate of 4.5%. The economy is expected to shrink by 0.5% next year, compared with a previous estimate for zero progress, before a rebound to 1% growth in 2024.
Rather than Britain coming close to Truss’s growth target of 2.5% a year, Deutsche Bank said the country’s growth rate would settle at closer to 1.25% a year by the middle of the decade.
“Any tangible impact on the economy will take time to feed through,” Raja added. “And any meaningful boost to supply (labour, capital, productivity) will likely only start to translate into stronger growth in the second half of the decade.”
