In the short term, the BCC is now forecasting a recession for the UK economy with three consecutive quarters of contraction between Q2 and Q4 in 2022. Annual expectations for GDP growth also continue to decline, with 3.3% forecast for 2022, significantly below the 7.4% growth recorded in 2021. However, unlike the Bank of England, the BCC expects the economy to grow in 2023, albeit at a very low 0.2%, with a slight increase to 1% in 2024.
These anaemic predictions for GDP growth are in light of deteriorating economic conditions; rising energy costs, a decline in household spending and real wages; weaker export prospects and a pessimistic global economic outlook; poor investment conditions and weakening business confidence and cashflow. Many of these issues were initially caused by the global response to Covid-19 and have been further compounded by the war in Ukraine.
Inflation to peak at 14%
Businesses and consumers will continue to face exceptionally high costs as rampant inflation spirals upwards in 2022. Increased and more sustained inflationary pressure is now forecast for Q4 2022, as the Consumer Price Index (CPI) inflation rate is expected to reach a peak of 14%. This is up from the previous, already high, projected rate of 10%. The CPI rate is expected to slow to 5% in 2023, and finally return to the Bank of England’s target of 2% in 2024.
The forecast for the Bank of England’s interest rate remains unchanged; the rate is expected to increase from 2% in 2022 to 3% in 2023 and 2024. Inflation is expected to outpace growth of earnings by over 3:1 in Q4 2022, with average earnings increasing by 4.5% in Q4 2022.
Investment and recovery expected to be anaemic
Business investment is set to grow at 2.7% in 2022, an upward revision from the Q2 forecast of 1.8%. This is likely to be driven by growth in building construction rather than spending on machinery or equipment. However, it is expected to increase by only 0.6% in 2023, slightly down from the 0.8% growth predicted in Q2.
Overall investment is expected to grow by 4% this year but shrink by 0.4% in 2023 before rebounding to 1.1% in 2024. Consumer spending is now forecast to grow at 3.8% in 2022, a fall from the 4% predicted in Q2.
Commenting on the forecast, Alex Veitch, Director of Policy at the British Chambers of Commerce, said:
“Our latest quarterly economic forecast will not be of any comfort to either consumers or businesses. The extreme inflationary pressures already present are only likely to increase as we head towards Christmas; with the UK economy already thought to be in recession. Tackling these pressures must be at the top of the new Prime Minister’s inbox when they take up their position next week.
“We have revised our projected inflation rate upwards by four percentage-points to a new high of 14%. Inflation is running rampant, and it is not only impacting the cost of doing business, but also the ability of some firms to keep their doors open. In January, the BCC found that 23% of businesses surveyed were looking to scale down or even consider closure in response to rising costs.
“With prices spiralling out of control, they are expected to race ahead of earnings growth by a ratio of 3:1 in Q4 2022. This will undoubtedly impact consumer confidence, another key concern for businesses.
“Action is needed now, and the BCC has set out a comprehensive plan for Government to provide vital support to firms.
“Along with taxation and labour measures, the BCC business support plan includes key asks to help businesses with spiralling energy costs. These include Covid-style support by introducing a Government Emergency Energy grant, a temporary cut in VAT on energy bills to 5% to reduce costs for firms and increased regulation of the energy market for businesses by Ofgem.
“Through our extensive research and forecast work, we know the problems currently facing businesses. Time is fast running out, the Government must step up to the plate and do what is needed to protect businesses, livelihoods and jobs.”
Key points in the forecast:
• Following a contraction of growth in Q2 2022 by 0.1%, quarter-on-quarter GDP growth is forecast to continue to decline in Q3 by 0.1% and Q4 by 0.3%, before a slight increase in growth of 0.2% in Q1 2023.
• Household consumption forecast is for growth of 3.8% in 2022, growth of 0.3% for 2023 and 1.1% in 2024.
• Business investment forecast is to grow by 2.7% in 2022 before more than quartering to 0.6% in 2023, and then rising to 1.2% in 2024
• BCC expects export growth of 2.3% in 2022, 1.8% in 2023 and 1.2% in 2024, compared to import growth of 7.7%, -3.8% and 1.6%
• BCC expects UK unemployment rate of 3.8% in 2022, before rising to 4.1% in 2023 and 2024
• CPI inflation is forecast to peak at 14% in Q4 2022, before falling to 5% by the end of 2023. Inflation is expected to drop back to the Bank of England’s 2% target by Q4 2024
• UK official interest rates are expected to rise to 2% by Q4 2022 and then to 3% in Q4 2023, ending 2024 at the same level.