Downward revision

UK seen avoiding recession despite fall in growth

Construction, housebuilding
Slower growth is expected (pic: Terry Murden)

Britain should avoid a recession as long as there are no further energy shocks or sharp increases in interest rates, according to a key forecasting group.

The EY Item Club provides a glimmer of optimism despite downgrading the UK’s growth prospects. Its summer forecast expects GDP to grow by 3.7% this year, down from the 4.1% predicted in the spring.

It believes growth will fall to 1% in 2023, a downgrade from 1.9%, before expanding by 2.4% in 2024 as inflation falls.

Its downwards revisions are prompted by the continued squeeze on households’ real incomes from higher inflation, ongoing supply chain disruption, borrowers facing the consequences of a series of interest rate rises and the rise in asset prices during the pandemic now subsiding.

Hywel Ball, EY UK chair, says: “The outlook for the UK economy has become substantially gloomier than it was in the spring, but – while there are significant risks – the forecast suggests there should still be enough supports to help the economy eke out growth over the rest of the year and avoid a recession.”

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The summer Forecast says that business investment is unlikely to return to its pre-pandemic levels on a sustained basis until 2025.

ITEM Club says inflation is now likely to peak at 11% in the autumn and average 8.7% over the course of 2022.

Martin Beck, chief economic adviser to the EY ITEM Club, says: “Although households are experiencing a significant squeeze, there are factors helping to relieve some of the pressure.

“Job security provided by unemployment being at a near-50-year low and a candidate-friendly jobs market should give consumers more confidence in saving less and borrowing more.

“The UK economy’s current relative weakness means the Bank of England’s Monetary Policy Committee has been right to take a more cautious approach to raising rates than other central banks.”

EY’s forecast contrasts with the Deloitte CFO survey. It reckons there is a 63% probability of a recession within the next year.

CFO expectations for interest rate rises have also sharply increased. They now anticipate rates to almost double over the next 12 months with the Bank of England’s base rate reaching 2.5% in a year’s time (up from 1.5% in Q1).

The survey was conducted between 16 and 30 June, before the GDP figures published o 13 July which showed the UK economy unexpectedly grew by 0.5% in May, defying predictions that it was sliding into recession. Analysts had predicted growth of just 0.1% after it contracted by 0.2% in April.

Insolvencies fall

Corporate insolvencies in Scotland fell by 39% during the first six months of 2022, despite spiralling inflation, rising interest rates and energy costs, supply chain disruption and ongoing geo-political uncertainty continuing to pile pressure on businesses.

Analysis of notices in The Gazette by Interpath Advisory reveals that a total of 11 companies fell into administration in Scotland from January to June 2022 – down from 18 during the same period in 2021.

This does not reflect the UK picture, however, which saw a total of 451 companies fall into administration in H1 2022 – up from 312 companies in H1 2021, but still not back at the pre-pandemic levels of 655 in H1 2020 and 686 in H1 2019.

The rising number of UK insolvencies can be seen across a wide range of sectors, with building and construction, industrial manufacturing, and retail industries experiencing the sharpest rises.

Whilst the lower level of administration appointments in Scotland will be welcome news, concerns remain that Scotland may follow the UK trend of a rise in insolvencies over the coming months as economic and macro factors continue to hit Scottish businesses.

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