KPMG Slashes UK Growth Forecasts, sees No Recession
- Written by: Gary Howes
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- UK GDP forecasts cut
- Inflation forecasts lifted
- Staff availability to improve
- Housing market reaches a turning point
Image © Adobe Stock
War, surging commodity prices and China's Covid outbreak are the main drivers of a sharp economic slowdown that could result in a "mild" UK recession taking hold in 2023 says KPMG whose economists cut forecasts for UK economic growth in 2022 and 2023.
Inflation and the resultant cost of living crisis have their roots in international developments but in a mid-year briefing on the economy KPMG says the increasing tax burden is also to blame for the cut to forecasts.
"The cost of living crisis and the rising tax burden have led to a fall in consumer confidence which is set to drag on discretionary spending. Business investment is expected to be particularly weak next year without any further government support," says a note from the international financial services giant.
According to the Institute for Fiscal Studies the current government of Boris Johnson and its Treasury under Rishi Sunak has announced tax rises worth 2% of GDP in just two years.
This is more than Tony Blair and Gordon Brown achieved in ten years.
KPMG forecasts UK GDP growth to more than halve this year to 3.2%, before slowing further to 0.7% in 2023.
KPMG's base case modelling does not anticipate an UK recession but the risks are skewed to the downside, meaning such an outcome is now possible.
"A sharper deterioration in the external environment – causing a recession in some of the UK’s major trading partners – coupled with a stronger fall in consumer spending in the UK, could see the UK economy entering a mild recession next year," says Yael Selfin, Chief Economist for KPMG in the UK.
Three developments could push the UK into recession, says KPMG:
- A potential US recession arising from a significant monetary tightening by the US Fed;
- A potential Eurozone recession due to interruptions of gas supplies from Russia, as well as a significant additional shock to global wholesale gas and oil prices;
- An ongoing and worsening squeeze on UK household incomes leading to a sharp decline in household consumption.
Above: "Recession in our downside scenario may be relatively mild" - KPMG.
Inflationary pressures are anticipated to remain elevated as inflation extends higher from May's 9.1% towards a peak that the Bank of England recently estimated could be as high as 11%.
KPMG upgrades its inflation forecast profile and expects average inflation for 2022 to be at 8.1%, up from 7.9% in their April report.
Above: The rising cost of energy means the UK will see its inflationary peak come later than other countries.
"We expect inflation to begin to normalise from 2023 Q2 onwards, and to return to the Bank of England’s 2% target in 2024 Q2," says Selfin.
Regarding Bank of England policy, KPMG falls into the dovish camp of economists who see limited further hikes.
They see just two more hikes being delivered in 2022 as the Monetary Policy Committee will have to weigh the risk of high inflation spilling into pay growth against the risk of a recession.
"We think it is likely that the doves on the Committee could swing the balance towards a more gradual uplift than is currently priced in by the markets, especially in the context of the expected reduction of the Bank’s balance sheet that would further tighten financial conditions," says Selfin.
Regarding the labour market, KPMG says 2022 is set to remain an employee’s market as businesses continue to struggle to find the required staff.
But, staff availability is improving somewhat, they say and as workers return to the jobs market and demand cools the UK's unemployment rate would pick up.
KPMG's forecast envisages a gradual pickup in the unemployment rate, averaging 4.2% in 2022 and 4.6% in 2023.
Pay should meanwhile remain elevated in an employees' market, KPMG forecasts pay growth to stay elevated in the coming months, before moderating next year.
Median pay growth is expected to peak at around 7%, averaging 6.3% in 2022 and 5.8% in 2023.
The housing market has meanwhile reached a turning point as the recent months of hot price acceleration moderates in the face of rising interest rates at the Bank of England.
UK median pay rose by 12% cumulatively since the start of 2020, against growth of 21% in average house prices.
"Rapidly falling affordability could be a key driver of a slowdown in the housing market," says Selfin, "in addition, higher mortgage interest rates will increase the cost of servicing debt, reversing the downward trend seen over the past decade."
