UK economy marred by uncertainty while high inflation takes its toll on global growth prospects

The UK economy is likely already in a mild recession with growth expected to stay negative for the rest of this year

The UK economy is likely already in a mild recession with growth expected to stay negative

  • The UK economy is likely already in a mild recession with growth expected to stay negative for the rest of this year
  • Latest inflation outlook indicates interest rates may peak at lower levels than financial markets currently price in    
  • Market volatility and investors' concerns could see tighter global financial conditions
  • Depreciating currencies and rising borrowing costs have exposed vulnerabilities and increased the risk of contagion

The UK economy is likely in a recession, but it could be shallower compared to previous downturns, with GDP falling by 1% between Q1 and Q4 of this year. Overall, UK growth is expected to average 3.2% this year, greatly boosted by weaker GDP in 2021 due to pandemic-related restrictions. Further out, however, a picture of stop-start growth in 2023 could lead to a full year fall in GDP of 0.2% compared to 2022, according to the latest KPMG Global Economic Outlook.

European and UK gas markets have been extremely volatile throughout the past 12 months. By August this year, UK domestic energy bills had already risen by 73.2% compared to a year ago. The UK Government’s decision to cap domestic energy bills at £2,500 from October has avoided the expected series of sharp rises that could have seen bills rise by another 235% by April 2023. The report forecasts that these measures will reduce the headline rate of inflation by around 5 percentage points next year. This will help to keep UK inflation peak at 10.5% in October this year before it is expected to fall throughout the following two years.

The new Government announced a large package of fiscal loosening amounting to around £160 billion over the next two years, equivalent to 3.2% of GDP per annum. This included £45 billion of permanent tax cuts. Financial conditions have tightened sharply as a result of the announcements, with investors demanding a higher premium for financing UK debt. Currently, sterling is down by 6.4% against the US dollar since the start of September, while 5-year gilt yields are around 190 basis points higher. Financial markets now expect the Bank of England to raise interest rates to a peak of around 6% next year.

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KPMG forecasts for the UK













Unemployment rate




Source: ONS, KPMG forecasts. Average % change on previous calendar year except for unemployment rate, which is average annual rate. Inflation measure used is the CPI and the unemployment measure is LFS.

Yael Selfin, Chief Economist at KPMG UK, commented on the report:

“The aggressive repricing in the financial markets over the past week reflects investors’ perception that a weaker pound will be necessary to finance the UK’s current account deficit. However, the weakness in sterling is also a story of a very strong US dollar this year as the pound’s depreciation has been softer against a broader basket of currencies. The good news is that profit margins could soon recover for UK exporters who have been facing a challenging trading environment.

“The outlook for the UK economy will be dominated by a tug of war between a loose fiscal policy and a tight monetary policy. While the former is set to boost household budgets and alleviate the impact of higher energy prices, the latter will counteract stronger demand by making borrowing more costly. A key risk is that a more prolonged period of high inflation and a weak pound would make us all worse off even if the global environment turns a corner.”

Global growth outlook

Growing geopolitical uncertainty and inflationary pressures are set to take their toll on global economic growth projections.

KPMG is forecasting GDP growth of 1.9% in 2023, down from 2.7% in 2022, as the world grapples with a multitude of economic and political challenges. Weaker growth could see inflation moderate to 4.7% in 2023 after averaging 7.6% in 2022.

The Global Economic Outlook warns that an acceleration in inflation is putting pressure on households’ finances and businesses’ margins, while leading central banks to tighten monetary policy aggressively, with recession once again on the horizon in many economies.

Rising costs are taking their toll on consumers, with a cost-of-living crisis putting a significant dent on households’ purchasing power. Consumer confidence has taken a big knock across most economies and household spending is following suit, causing overall economic growth to weaken.

Yael Selfin, Chief Economist at KPMG UK, said:

“The need for fiscal support is likely to stoke more inflation in the medium term, placing fiscal policy actions at odds with the aims of central banks in meeting their mandates.

 “Our latest forecast suggests that tightening monetary policy will moderate inflation, but inflationary pressures are likely to linger for longer. That is why central banks are likely to be more hawkish in their response to what could be a relatively short-lived burst in inflation.

“A very aggressive cycle of monetary tightening across the world could impose high costs for the global economy as it emerges from another synchronised shock. Other policy tools and further reforms to open up supply could be deployed to ease the burden on central banks.”  




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Notes to Editors:

About KPMG’s Global Economic Outlook:

KPMG’s Global Economic Outlook provides bi-annual economic forecasts, produced by macroeconomics teams across KPMG’s global network using a suite of external and in-house models capturing the main inter-relationships in the world economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly.

About KPMG

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 15,300 partners and staff.  The UK firm recorded a revenue of £2.43 billion in the year ended 30 September 2021.

KPMG is a global organisation of independent professional services firms providing Audit, Legal, Tax and Advisory services. It operates in 145 countries and territories with more than 236,000 partners and employees working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.