Britain’s economy will “grind to a halt” before shrinking in the second half of this year as soaring inflation and tax rises take their toll, according to forecasts from one of the UK’s leading business groups.
Consumers and business will pay a high price for Russia’s invasion of Ukraine and persistent delays to supplies from China, said the British Chambers of Commerce (BCC) as it downgraded its outlook for growth next year to 0.6%.
With petrol reaching a fresh high of £1.80 a litre and gas prices showing no signs of easing, the BCC said inflation was likely to hit 10% before the end of the year.
The gloomy forecast chimed with earlier analysis by the Organisation for Economic Co-operation and Development (OECD), though the Paris-based thinktank said the UK was on course for an even rockier ride in 2023.
Experts at the OECD said the UK’s growth rate was expected to go from the second-fastest-growing economy this year in the G7 group of industrial nations after Canada to the slowest-growing when GDP growth slows to zero next year.
Analysts said the forecasts were likely to spook consumers and depress the housing market, which has slowed markedly in recent months.
Consumer confidence has already fallen to record lows in response to an unprecedented cost of living squeeze that is expected to continue for the rest of the year despite a further £15bn of welfare cheques and energy subsidies announced by Rishi Sunak last month.
Danni Hewson, an analyst at the stockbroker AJ Bell, said reductions in growth forecasts that put the UK at the bottom of the industrialised world had put a downward pressure on shares in London.
“The housing market is cooling, the construction sector slowing and consumer confidence looking distinctly anaemic,” she said. “There is mounting pressure for further government intervention, and dire warnings about the prospect of no growth for the UK economy next year will smart. The whole world is paying the price for Russia’s invasion of Ukraine but, according to the OECD, the UK has been singled out.”
The BCC said the government’s efforts to boost business investment had fallen flat over the last year and would suffer a reverse in the next year, with the level of growth halving to just 0.8% in 2023.
“The forecast drop in business investment is especially concerning. It is vital that urgent action is taken here, and we are having constructive conversations with the government about its review of capital allowances and other policies to incentivise business investment,” the BCC report said.
“The downgrade reflects heightened political and economic uncertainty, and rising cost pressures which are limiting smaller firms’ abilities to invest. The survey data for business investment have shown no sign of recovery since the start of the Covid pandemic.”
A tight labour market will mean that the demand for workers remains high and unemployment is low this year and in 2023, but below inflation pay rises will mean the current cost of living crisis depresses consumer spending. And BCC economists fear inflation will take months to be brought under control.
“We forecast that if trends continue, inflation will only return to the Bank of England’s target rate of 2% at the end of 2024, implying a prolonged period of difficulty for the UK.”
A further squeeze on consumers is expected to come from higher interest rates, which the Bank of England will impose to limit the rise in prices.
The BCC said the central bank’s base rate would rise to 2% by the end of this year and 3% in 2023, pushing mortgage rates to levels not seen since before the 2008 financial crash.
BoE officials meet next week to make their own assessment of the economic outlook and are expected to increase the bank’s base rate from 1% to 1.25%.
