The UK could enter a “mild recession” next year if further declines in consumer spending deal a blow to the country’s major trading partners, KMPG said in its latest economic outlook.
The Big Four accounting firm forecasts that growth in the UK's gross domestic product will more than halve this year to 3.2%, slowing to about 0.7% in 2023.
A recession is usually defined by two or more quarters of negative GDP growth, though it is widely used to describe a prolonged period of decline in economic activity.
KPMG’s outlook is based on an anticipated drop in spending now that UK consumer confidence is dragging at an all-time low.
GfK’s consumer confidence index fell from –40 in May to –41 in June, the lowest since the company began tracking the data in January 1974.
“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, with manufacturing and financial services among the worst affected sectors,” said Yael Selfin, chief UK economist at KPMG.
“We expect GDP growth to more than halve this year to 3.2%, before slowing further to 0.7% in 2023. 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.”
A potential deterioration in Russia’s energy supply, which could be hit by a new energy price cap, and further lockdowns in China resulting from its zero Covid-19 policy “could worsen the outlook”, Selfin added.
An energy price cap proposed by United States negotiators at this week’s G7 global summit of world leaders could enable countries such as the UK or European Union members to weaken sanctions on Russia and instead buy Russian oil at a restricted price to curb the country's profits.
The KPMG report predicts that the Bank of England will carry out two further interest rate rises this year, following a series of ‘back-to-back increases.
Selfin expects these rate rises will be followed by a pause in fiscal tightening, during which central banks may act to prevent inflation falling too low.
“Combined with the pressures on household budgets, the Monetary Policy Committee will have to weigh the risk of high inflation spilling into pay growth against the risk of a recession,” KPMG's chief UK economist said in the report.