Investments  

What's next for the UK economy?

  • Describe how monetary policy impacts the real economy
  • Explain how the UK's outlook compares with other developed markets
  • Identify the implications of the present very low rate of unemployment
CPD
Approx.30min
What's next for the UK economy?
The UK economy has hardly grown over the past year. (Pierre Blaché/Pexels)

Six months ago the UK economy appeared to be on an horrific path, with the Bank of England forecasting eight consecutive quarters of negative GDP growth, which would represent the longest recession in British history.

And the outlook for the rest of the developed world seemed equally dire, as a combination of rising interest rates and soaring energy prices damaged consumer and business confidence globally.

Equity and bond markets followed suit, as investors sold off fixed income holdings in fear of the consequences of higher interest rates, and equities were also viewed as generally unattractive as investors feared recession. 

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But with both the BoE and the International Monetary Fund having revised upwards their forecasts for the UK and global economies, albeit with both institutions still expecting the economy to shrink this year, is the outlook significantly different for clients? 

Skirting around recession

Luke Bartholomew, senior economist at Abrdn, says: “Six months ago people were acting as though we were already in recession, but while it looks as though we have avoided it, the data remains very weak.

"I think one of the confusing things about it, when trying to understand the longer-term outlook, is that there have been quite a few idiosyncratic events which distort the data.

"So the Queen’s funeral and associated bank holidays had a negative impact, but then you had the football World Cup, which unusually happened in winter, and boosted GDP in that month.

"And in 2023 there have been months where the data would be distorted by strikes and then it bounces back. For example, a strike by healthcare workers impacts the GDP of the services sector, while better than expected weather in February boosted the construction sector.”

He expects the idiosyncratic factors to continue to impact the data in coming months, with the extra bank holiday for the coronation having a negative impact on economic activity in the month it occurs, while any ending of strikes will likely have an outsized positive impact in any month where there is no such action.

But Bartholomew says despite all of the uncertainties surrounding the data, and any economic recovery that may have occurred, he still expects negative GDP growth in the UK for 2023.

He says: “We may not get the technical recession, defined as two consecutive quarters of negative GDP growth, but there will be recessionary conditions throughout the year.

"The thing that saved Britain from a deeper recession towards the end of last year was the savings built up during the pandemic. We didn’t get a boom from those savings, probably because of the spike in energy prices, but it did prevent a deeper recession.

"But it is clear the economy is stagnating as the impact of tighter monetary policy takes its toll.”