Deutsche Bank has said that it now forecasts the UK heading for a recession with “growth likely to remain subdued for much of the next year or so”.
It noted that GDP was likely to slow from 4.5 per cent this year to -0.5 per cent next year, before rising by one per cent in 2024.
The bank said: “We now expect GDP to return to its pre-pandemic level only in 2024, with growth recovering to its trend rate (1.25 per cent) around the middle of the decade.”
Three factors for the downturn
Senior economist Raja pointed to three main factors that had affected the bank’s forecast – rising inflation, higher interest rates and global effects such as the war in Ukraine and the ensuing energy crisis.
In terms of inflation, Raja said: “We anticipate inflation to remain stickier than before. We now only anticipate a return to two per cent CPI around late 2024.”
However, there was also a hint of optimism as he noted: “There is some good news, however. Despite sustained and elevated inflationary pressures on household budgets, fiscal policy has eased significantly.
“From the Energy Price Guarantee, to a considerable sum of tax cuts, we now anticipate real disposable incomes to be less squeezed from the inflation shock, particularly across the next two years.”
Meanwhile, the bank forecast that rising interest rates would also continue to be a key drag on growth.
Raja said: “With the bank rate getting close to five per cent next year, higher debt costs will weigh on consumption – for both households and businesses, particularly during a period of weaker economic growth and high uncertainty. This should see the unemployment rate rise a little further than our previous assumptions.
Finally, Deutsche Bank highlighted a weakening global backdrop as a third adverse factor on growth – one that was out of the UK’s control.
Raja said: “The global backdrop has weakened further. While fiscal policy in the UK should partially insulate households from the oncoming winter shock, the global backdrop will continue to depress sentiment for both households and businesses as we move rapidly to the end of the global business cycle.”
Refinancing pain approaching
On the back of this volatile macroeconomic background, Deutsche Bank also noted that the mortgage market was likely to suffer as a result.
Raja said: “Unlike the last decade, higher interest costs will hurt household consumption. With the bank rate projected to now rise to near five per cent, the impact on mortgage holders will be meaningful.
“With nearly 8.5 million mortgages in the economy, and close to £100bn in refinancing expected next year (a 40 per cent increase from 2022), the cost to mortgage holders we estimate could be around £3bn – marking a near 40 per cent increase from last year for those refinancing their mortgages.”
He added: “New property purchases will also weigh on household budgets, given higher mortgage costs.”
