A recession in the UK will be avoided this year, but the economy will remain below its pre-pandemic size until the end of next year, according to a new forecast.

Falling energy prices, resilient household spending, and stronger business confidence have contributed to an improved outlook change, says the British Chambers of Commerce.

It is now expecting GDP to fall in the first quarter of this year, before three quarters of flat or weak growth and an overall contraction of 0.3% for the year.

This is a slightly more optimistic outlook than predictions from either the Office for Budget Responsibility or the Bank of England. The BCC also expects the economy to grow in 2024, at 0.6%, compared to the BoE’s forecast of 0.25% shrinkage.

Household spending held up well, despite a fall in real disposable income due to rising energy costs, inflation outstripping wages, frozen income tax allowances and higher mortgage payments.   

Exports were also stronger than expected in the second half of 2022, in part due to fuel and machinery demand, and also trade in precious metals – likely seen as a safe harbour in uncertain times. 

However, this trend is not expected to continue with a 4.5% decline in exports predicted across 2023. BCC research also shows that while overall export values have held up, many smaller companies are not reporting any improvements in their trading conditions. 

Despite a big drop in business confidence in Q3 2022, this now appears to have stabilised albeit at a lower level. Business investment has now returned to pre-pandemic levels, although it was not performing well then. 

With an expected rise in corporation tax coming down the tracks, alongside a business rates revaluation in April, and higher interest rates, this is likely to lead to flatlining investment in 2023 at 0.2%.    

Alex Veitch, director of policy at the BCC, said: “Businesses are most concerned about the difficulties in recruiting staff, paying energy bills and taxes. We know we have a tough year ahead and there is little incentive for firms to risk ploughing dwindling cash reserves or fresh loans into projects.”

The improved outlook will be welcome news at the Treasury ahead of Jeremy Hunt’s Budget next week.

Figures from the Office for National Statistics on Friday are expected to show a rise in growth of 0.1% in January after a 0.5% contraction in December.