You are here: Home - News -

Base rate to hit 5.25 per cent but UK likely to avoid recession

by: Samantha Partington
  • 12/06/2023
  • 0
Base rate to hit 5.25 per cent but UK likely to avoid recession
A better outlook for energy prices, greater resilience in the global market and demand for labour outweighing availability means the UK economy is likely to avoid a recession this year but the Bank of England base rate is only heading one way, according to the 'Big Four' firm.

KPMG’s more optimistic outlook for growth is in line with recent forecasts from the Organisation of Economic Co-operation and Development (OECD) and the Confederation of British Industry (CBI), both predicting the UK will now dodge a recession. But big challenges remain ahead.

GDP growth will remain weak by historical standards at 0.3 per cent this year and 1.1 per cent next year, according to the accountancy firm’s forecast. It puts this down to several downside risks including high inflation, recent tensions in the banking system, the uncertain impact of such a rapid rise in interest rates on the economy, and worsening geopolitical tensions.

Although it was widely expected in 2022 that the UK would enter a technical recession, which is two consecutive quarters of negative GDP growth, so far this has been avoided.

Government support for households and business to cope with higher energy prices, low unemployment as job vacancies outnumber available workers and an excess of savings built up during the pandemic has alleviated pressure on household budgets.


Base rate on the way up

Inflation at 8.7 per cent has not fallen as quickly as the Bank of England (BoE) had hoped leading KPMG to forecast three further rate rises from the Bank of England this year, taking the base rate to a peak of 5.25 per cent.

This forecast for rising rates is in line with Monetary Policy Committee member Jonathan Haskel who wrote in an article for The Scotsman newspaper that the BoE may need to raise rates again to bring inflation under control, .

He said: “We are monitoring indicators of inflation momentum and persistence closely. My own view is that it’s important we continue to lean against the risks of inflation momentum, and therefore that further increases in interest rates cannot be ruled out. As difficult as our current circumstances are, embedded inflation would be worse.”


‘Slightly stronger momentum for UK economy’

KPMG says the impact of monetary tightening has yet to fully feed through to the economy, in part due to the stock of fixed rate mortgages that have yet to expire.

Yael Selfin, chief economist at KPMG UK, said: “We’ve seen slightly stronger momentum for the UK economy but risks are still elevated on the downside. Stickier inflation will see monetary policy tightening even further, increasing the risk of unwelcome side effects among other potential headwinds.”

KPMG forecasts that inflation will fall to 7.7 per cent this year and 2.9 per cent in 2024, unemployment will rise from 4.3 per cent this year to 4.6 per cent in 2024 and consumer spending will rise from 0.2 per cent in 2023 to 0.6 per cent next year.

The CBI has a slighter brighter outlook with expectations that the economy will expand 0.4 per cent this year and 1.8 per cent next year. The industry body had previously thought a 0.4 per cent contraction in 2023 was on the cards. Aside from falling energy prices, the CBI says its upgrade was down to the re-opening of China’s economy from Covid restrictions and the easing of supply chain disruptions. The OECD, meanwhile, upgraded its forecast from a 0.2 per cent downturn in 2023 to growth of 0.3 per cent.

There are 0 Comment(s)

You may also be interested in