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Impending UK recession could be twice as bad as anticipated, say analysts

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The UK’s impending recession could be twice as bad as previously thought, according to leading economic forecasters at the business consultancy EY.

Reduced government support, higher taxes and an overall worsening outlook have all led the firm’s analysts to conclude that the next three years could be worse than they anticipated three months ago.

In October, EY’s Item Club had predicted a 0.3% contraction in gross domestic product (GDP) this year, followed by 2.4% growth next year and a 2.3% rise in 2025.

But in an updated forecast released on Monday, it said GDP would drop 0.7% this year, followed by growth of 1.9% and 2.2% over the next two years.

The downgrade is at odds with recently published economic data and the sentiment coming out of the World Economic Forum in Davos, which suggested the global outlook was not quite as grim as first feared. In recent weeks the FTSE 100 has neared its highest level ever.

“The UK’s economic outlook has become gloomier than forecast in the autumn, and the UK may already be in what has been one of the mostly widely anticipated recessions in living memory,” said EY’s UK chair, Hywel Ball.

Ball said that while the recession could cut deeper than previously thought, it would not necessarily last longer than earlier forecasts noted.

EY said it was still unclear if the country was already in recession – as defined by two quarters of consecutive GDP contraction. While the economy shrank in the third quarter of last year, GDP figures released this month showed that the economy grew unexpectedly in November by 0.1%, leading some economists to think the fourth quarter might be positive.

Despite this EY said the UK was still expected to hit recession this year, shrinking during the first half of 2023, before returning to growth during the summer. The recession would probably also prove less damaging for the economy than the recessions of the 1980s, 1990s and 2000s, it added.

“The one silver lining is that, despite being a deeper recession than previously forecast, it won’t necessarily be a longer one,” Ball said. “The economy is still expected to return to growth during the second half of 2023 and has been spared any significant new external shocks in the last three months from energy prices, Covid-19 or geopolitics. Meanwhile, the chief headwind to activity over the last year – high and rising inflation – may be starting to retreat, while energy prices are falling too.”

The economists forecast that inflation would hit 7.2% this year on average, including a big jump when the government’s energy support scheme becomes £500 a year less generous for the typical household from the start of April.

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