UK Economy's Near Miss with Recession: Economist Views and Forecasts   

"Monthly GDP is now estimated to be 0.3% below its pre-coronavirus (COVID-19) levels (February 2020)" - Office for National Statistics.

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The UK economy eked out a second month of growth for the final quarter in November, suggesting a recession has been avoided while inviting economists to reconsider their assumptions and forecasts for the year ahead.

UK economic output rose by 0.1% in November following a 0.5% gain in October that makes a final quarter economic contraction unlikely and comes despite the average household energy bill having risen by more than 25% to £2,500 from the end of September. 

November growth resulted from a 0.2% expansion in the breadwinning services sector driven by a range of industries including those dealing directly with consumers, although in some other areas of the economy, the third-quarter downturn deepened.

This was especially the case in the industrial sectors where headwinds could yet grow further as subsidies for high energy costs are reduced up ahead. 

"Monthly GDP is now estimated to be 0.3% below its pre-coronavirus (COVID-19) levels (February 2020)," the Office for National Statistics says.

"Manufacturing was the main driver of negative production growth in November 2022, partially offset by a positive contribution from mining and quarrying," it adds in reference to industrial production.

But while headwinds remain, consensus in the financial markets was that GDP would fall by around -0.3% for November, placing the economy on course for a second decline and entry into a recession during the final quarter.

The surprise has implications for the views and forecasts of analysts and economists, some of which are set out below. 

Holger Schmieding, chief economist, Berenberg 

"As long as the November data are not revised down, real GDP in Q4 seems to have held up somewhat better than we had expected. Keeping our monthly estimate for December unchanged at -0.3% mom, the resilient November data lift our Q4 call to flat qoq versus a 0.3% fall previously."

"The less depressed starting level raises our forecast for the change in 2023 real GDP to -0.8% from -1.0% previously."

"Once the inflation shock fades and financial conditions moderate, we expect the UK to bounce back with slightly above-trend growth in 2024 and 2025 of 1.6% and 1.7% respectively." 

"While consensus may also raise its 2023 forecast (currently -0.9%, according to Bloomberg), we remain above consensus in 2024 (0.9%)." 

Ibrahim Quadri, economist, Goldman Sachs 

"Folding in today’s stronger than expected data, we revise up our Q4 tracking estimate to 0.0% qoq (from -0.2% qoq previously) and our Q1 growth forecast to -0.3% qoq (from -0.4% qoq previously)."

"This pushes up our 2023 annual growth projection to -0.5%yoy (from -0.7%yoy previously), above both consensus expectations (-0.9%yoy) and the BoE's forecast (-1½%yoy)."

Emma Mogford, fund manager, Premier Miton Monthly Income Fund

“While better than expected, the November figure still shows the UK economy is weak. Recent results from food and clothing retailers suggest we may see a better number in December.  However, I expect further weakness in 2023 as the full effects of higher interest rates are felt.”

Marcus Brookes, chief investment officer, Quilter Investors

"Despite government support with energy bills and a reasonably mild winter thus far which should have supported people’s ability to spend, high inflation and rising everyday costs continue to have a significant impact on the economy."

"For the Bank of England, inflation remains the biggest scourge and as such we can expect it to continue to increase its base rate in the face of a recession – albeit there are growing calls to slow the pace of these hikes and for a pivot sooner rather than later."

"Chancellor Jeremy Hunt announced that the UK had entered a recession during his Autumn Statement, and this morning’s data does little to alleviate these concerns. December’s reading is expected to confirm what already is known, but only time will tell just how long and how deep the recession will be." 

Barret Kupelian, senior economist, PwC

"Going forward, we could start to see a more rapid decrease in headline CPI than our base case scenario due to a falling US Dollar and cheaper energy prices."

"At the same time however, ongoing delays and shortages in the health sector may lead to increased absences across the workforce which could further impact growth." 

Samuel Tombs, chief UK economist, Pantheon Macroeconomics

"Looking ahead, we continue to think that GDP will drop substantially in Q1 and Q2. The government has temporarily stopped paying Cost of Living grants to low-income households in Q1, and will then reduce substantially its energy price support in Q2."

"Meanwhile, the MPC’s rapid rate hikes have dramatically increased the cost of external finance for corporates, who mainly have floating rate loans. Surveys increasingly show that businesses are planning to respond to this financing shock by investing less and pushing through job cuts this year."

"Meanwhile, around 10% of households will refinance a mortgage this year, leading to a severe squeeze on their disposable income."

"The other 20% of households who have a mortgage but do not need to refinance this year likely will either focus on saving more or paying off the outstanding balance, so that they are best place to cope when they do refinance, while job losses will spur many other households to hold a larger-than-usual savings buffer."

"Accordingly, we continue to look for a 0.5% quarter-on-quarter decline in GDP in Q2 and a 0.9% drop in Q3. Recent falls in wholesale natural gas prices, however, suggest that consumer energy bills might start to come down in Q3."

"This also would free up funds for the Chancellor to reallocate from energy price support to propping up households’ disposable incomes in other ways. As a result, it’s conceivable that the green shoots of renewed growth will be emerging by the end of this year."