Interest rate hikes are expected to cut UK growth in half, according to a think group.
Interest rate hikes are expected to cut UK growth in half, according to a think group.
The impact of the Bank of England’s interest rate hikes is expected to have a long-term impact on economic growth in the UK, according to EY Item Club, which cut its projection for 2024 by more than half.
While the UK economy is likely to increase by 0.4% in 2023, up from the 0.2% predicted in spring, the following year’s forecast has been reduced from 1.9% to 0.8%. The economy is still on track to avoid a recession, albeit the 2025 GDP growth prediction has been reduced from 2.3% to 1.7%, according to EY.
The Bank of England is expected to raise interest rates twice more in August and September, with the Bank Rate peaking at 5.5% before rates begin to fall in the second half of next year.
Inflation is still forecast to fall rapidly in the second half of 2023, following the June surprise, but it will now conclude the year at just around 5%. It was predicted to conclude 2023 at roughly 3% in April.
Despite the uncertain long-term forecast, there are some encouraging signs in the statistics, according to Hywel Ball, EY’s UK chair.
“While the UK workforce may be smaller than past trends would suggest, it has grown back to pre-pandemic levels,” he noted.
“Energy prices are falling, and supply chain issues are easing.” Business investment, which has been lackluster for some time, is beginning to outstrip the overall economy. The framework for growth is in place, but the great unknown is the trajectory of inflation and interest rates.”
EY’s publication concludes that the UK’s economic outlook will be defined by the trade-off between the drag of higher interest rates on one hand and the boost to activity from lower energy prices, easing supply chain pressures, and an expanding workforce on the other.
The announcement comes on the heels of reports that corporate activity has experienced a “considerable slowdown” in the last month. The S&P Global Flash PMI survey revealed a “stalling” economy, according to the firm’s chief business economist.
Rising interest rates, higher inflation, and more caution among clients due to the uncertain economic future were all mentioned as a drag on business activity by survey respondents.
