Friday 2nd Sep 2022

Chambers’ Economic Forecast: New PM must act as UK economy set for recession before year end

The latest British Chambers of Commerce (BCC) forecast predicts the UK economy will plunge into recession before the end of 2022, with inflation spiking to 14% and lingering weakness in growth expected to continue into 2024.

The BCC represents a powerful network of 53 Accredited Chambers of Commerce across the UK, whose members include thousands of businesses of all sizes and sectors.

Chambers are now expecting:

UK GDP growth for 2022 of 3.3% (down from an expectation of 3.5% in the Q2 forecast) against a deteriorating economic outlook
UK inflation to reach 14% in Q4 2022, an upwards revision of four percentage-points from its previous projection of 10%
A recession for the UK economy this year, with negative economic growth for Q2, Q3, and Q4 2022

Short-term GDP expected to go into recession

In the short term, Chambers are now forecasting a recession for the UK economy with three consecutive quarters of contraction between Q2 and Q4 in 2022. Annual expectations for GDP growth also continue to decline, with 3.3% forecast for 2022, significantly below the 7.4% growth recorded in 2021. However, unlike the Bank of England, the BCC expects the economy to grow in 2023, albeit at a very low 0.2%, with a slight increase to 1% in 2024.

These anaemic predictions for GDP growth are in the light of deteriorating economic conditions, rising energy costs, a decline in household spending and real wages, weaker export prospects and a pessimistic global economic outlook; poor investment conditions and weakening business confidence and cashflow. Many of these issues were initially caused by the global response to Covid-19 and have been further compounded by the war in Ukraine.

Inflation to peak at 14%

Businesses and consumers will continue to face exceptionally high costs as rampant inflation spirals upwards in 2022. Increased and more sustained inflationary pressure is now forecast for Q4 2022, as the Consumer Price Index (CPI) inflation rate is expected to reach a peak of 14%. This is up from the previous, already high, projected rate of 10%. The CPI rate is expected to slow to 5% in 2023, and finally return to the Bank of England’s target of 2% in 2024.

The forecast for the Bank of England’s interest rate remains unchanged; the rate is expected to increase from 2% in 2022 to 3% in 2023 and 2024. Inflation is expected to outpace growth of earnings by over 3:1 in Q4 2022, with average earnings increasing by 4.5% in Q4 2022.

Investment and recovery expected to be anaemic

Business investment is set to grow at 2.7% in 2022, an upward revision from the Q2 forecast of 1.8%. This is likely to be driven by growth in building construction rather than spending on machinery or equipment. However, it is expected to increase by only 0.6% in 2023, slightly down from the 0.8% growth predicted in Q2.

Overall investment is expected to grow by 4% this year but shrink by 0.4% in 2023 before rebounding to 1.1% in 2024.
Consumer spending is now forecast to grow at 3.8% in 2022, a fall from the 4% predicted in Q2.

Commenting on the forecast, Suzanne Caldwell, Managing Director, Cumbria Chamber of Commerce, said:

“Chambers’ latest quarterly economic forecast won’t be of any comfort to businesses or consumers. The extreme inflationary pressures already present are only likely to increase as we head towards Christmas, with the UK economy already thought to be in recession. Tackling these pressures must be at the very top of the new Prime Minister’s inbox when they take up their position next week.

“We’ve have revised our projected inflation rate upwards by four percentage-points to a new high of 14%. Inflation is running rampant. It’s not only impacting on the cost of doing business, it’s also seriously affecting the ability of some businesses to keep their doors open. In January, a Chambers’ survey found that 23% of businesses were looking to scale down or even considering closure in response to rising costs.

“With prices spiralling out of control, they’re expected to race ahead of earnings growth by a ratio of 3:1 in Q4 2022. This will undoubtedly impact consumer confidence and what consumers are able to spend on, another key concern for businesses.

“Action is needed now, and the BCC, on behalf of Chambers nationally, has set out a comprehensive plan for Government to provide vital support to businesses.

“Along with taxation and labour measures, the BCC business support plan includes key asks to help businesses with spiralling energy costs. These include Covid-style support by introducing a Government Emergency Energy grant, a temporary cut in VAT on energy bills to 5% to reduce costs for firms and increased regulation of the energy market for businesses by Ofgem.

“Through our extensive research and forecast work together as a Chamber network, we know the problems currently facing businesses. Time is fast running out. The Government must step up to the plate, without further delay, and do what is needed to protect businesses, livelihoods and jobs.”

Key points in the forecast:

UK GDP growth forecast for 2022 is 3.3%, 0.2% in 2023 and 1% in 2024
Following a contraction of growth in Q2 2022 by 0.1%, quarter-on-quarter GDP growth is forecast to continue to decline in Q3 by 0.1% and Q4 by 0.3%, before a slight increase in growth of 0.2% in Q1 2023.
Household consumption forecast is for growth of 3.8% in 2022, growth of 0.3% for 2023 and 1.1% in 2024.
Business investment forecast is to grow by 2.7% in 2022 before more than quartering to 0.6% in 2023, and then rising to 1.2% in 2024
BCC expects export growth of 2.3% in 2022, 1.8% in 2023 and 1.2% in 2024, compared to import growth of 7.7%, -3.8% and 1.6%
BCC expects UK unemployment rate of 3.8% in 2022, before rising to 4.1% in 2023 and 2024
CPI inflation is forecast to peak at 14% in Q4 2022, before falling to 5% by the end of 2023. Inflation is expected to drop back to the Bank of England’s 2% target by Q4 2024
UK official interest rates are expected to rise to 2% by Q4 2022 and then to 3% in Q4 2023, ending 2024 at the same level

An fact sheet on the British Chambers of Commerce economic forecast can be found here.