UK economy faces underlying headwinds

• Although the likelihood of a recession has fallen, UK growth is expected to be negative in 2023
• Outlook for businesses remains mixed, with recent Spring Budget announcements aiming to boost investment likely to have only a temporary effect on UK growth  
• Sharp falls in inflation with easing supply chain pressures and resilient labour markets to support recovery for the global economy but uncertainty remains high
• KPMG forecasts world GDP growth of 2.1% and inflation at 5.3% for 2023

The UK economy proved to be more resilient than expected at the end of 2022 but the squeeze on household real incomes and the impact of past interest rate increases will likely derail short-term momentum, with UK growth expected to be negative this year at -0.3% and only 0.6% in 2024 according to the latest KPMG Global Economic Outlook.

KPMG also estimates that while the impact of strikes subtracted around 0.1 percentage point from underlying growth in Q4 2022, it will subsequently boost UK growth in the following quarter as the disruption unwinds and the impact on the volume of activity fades.

Household consumption will likely be a major headwind in 2023 with a fall of 0.4% expected, while higher prices continue to drag on real incomes although inflation is set to fall sharply this year. Furthermore, despite the Government’s announcement to maintain the Energy Price Guarantee at the £2,500 level for a further three months from April, the average household energy bill remains some 120% higher than over 2019‑21.

Higher costs of borrowing and a slowing growth outlook are expected to lead to weakening business investment during the course of this year. The announcement of the full expensing policy at the Spring Budget provides some continuity for investment incentives, however the new scheme is less generous than the one it replaced and only remains in place on a temporary basis so is not likely to increase the overall trend growth in business investment in the UK.

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

“Despite slightly stronger near-term momentum and the boost from the recent Budget announcements, ongoing tensions in the banking system and the lingering risk of a recession put a question mark around the outlook for the UK. The good news is that base interest rates have probably already reached their peak.

“Looking ahead, as the economy cools and inflation returns back to target, this may provide the Bank of England with an opportunity for a series of gradual rate cuts next year. Nonetheless, structural issues, including skills shortages, slowing workforce participation, and ageing population, dominate the longer‑term risks to the UK outlook.”

Global growth outlook

The outlook for the global economy took a positive turn in the first half of 2023 as inflationary pressures began to ease, but ongoing geopolitical tensions and domestic challenges in key markets are slowing any return to sustained growth, according to the latest forecast from KPMG.

According to the report, global energy prices returning to levels last seen prior to the invasion of Ukraine, combined with easing commodity and food prices, have helped put further downward pressure on inflation for the rest of 2023.  

Despite the positive news, major economies throughout the world are facing their own domestic pressures, delaying any hopes of improving market conditions and a drop in inflation. The nuanced, complex picture in each country, region and territory is placing unprecedented pressure on central banks, with worries that core inflation could remain sticky and price rises could become entrenched due to the relatively tight economic environment facing a number of territories. Growing fears for the wider international banking system could further complicate matters for central banks as they weigh in financial stability risks against a plan to bring inflation back to target.

KPMG is forecasting GDP growth of 2.1% in 2023 and 2.6% in 2024 with inflation forecast at 5.3% in 2023 and 3.2% in 2024, and global unemployment levels of 5.2% in 2023 and 5.4% in 2024.

Yael Selfin, Chief Economist at KPMG in the UK, said:

“Despite the resilience of the labour market and the improving inflation conditions, we expect global economic growth to be relatively modest over the next two years, and to stay below its long-term average. Global growth is expected to be driven by the recovery of the Chinese economy and a relatively strong growth in some of the emerging markets, while Eurozone and the US economy are expected to contribute less to global growth over the next two years. Risks to the outlook are broadly skewed to the downside given the volatility in financial markets.

“The global economy has been through a series of significant shocks over the past three years – the Covid-19 pandemic and the Russia-Ukraine conflict – and saw a major expansion to government debt and a significant hike in policy interest rates by central banks. The ramifications of some of these headwinds may not have surfaced yet and we are still to see their full impact and how they interact.”

-Ends-

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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 UK

KPMG LLP, a UK limited liability partnership, operates from 20 offices across the UK with approximately 17,000 partners and staff. The UK firm recorded a revenue of £2.72 billion in the year ended 30 September 2022.  

KPMG is a global organisation of independent professional services firms providing Audit, Legal, Tax and Advisory services. It operates in 143 countries and territories with more than 265,000 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.