UK set to avoid recession in 2023 and will gradually return to trend growth rates by end of next year but labour inactivity drives underperformance

• UK forecast to see 0.1% growth in 2023 and resume towards trend growth rates by end of next year with 1% growth in 2024 and 1.6% by end of 2025
• CPI inflation set to return to 2% target by end of 2024 - but prices cumulatively set to be 20% higher compared to the start of 2021
• UK is underperforming relative to other G7 countries as high levels labour inactivity acts as barrier to recovery with inflation pressures easing
• All of UK’s nations and regions have reported growth in the three months to February 2023 but northern regions more heavily impacted by sluggish growth in specific industries 
  

The UK is expected to avoid recession in 2023 and start to return to trend growth rates towards the end of next year but its recovery is still underperforming compared to G7 peers, according to the latest edition of PwC’s UK Economic Outlook.

PwC’s UK economics team expects to see around 0.1% growth in 2023 and 1% growth in 2024, rising to 1.6% by end of 2025 as inflation pressures start to significantly ease over coming months. PwC’s modelling anticipates Consumer Price Index (CPI) inflation to return to target of 2% by the end of next year, although there is a risk price increases remain higher in food and services.

Despite this improved outlook, however, the report notes that the UK’s recovery is lagging behind its G7 peers. In particular the UK’s high levels of labour inactivity for over-50s is a key driver.

Barret Kupelian, senior economist at PwC says:

“Our analysis suggests the UK has very much passed through the eye of the inflationary storm compared to last year, and is showing signs of a return to some sort of normality this year. But any recovery is subject to risks which could include future geo-political shocks, persistently higher inflation pressures and a weaker sterling. Cumulatively, we expected prices by the end of next year to be 20% higher than they were at the start of 2021, and this will continue to mean that businesses and households will need to reconfigure their approach to pricing and spending.

“What is important, as the immediate inflation pressures abate, is to look seriously at the structural issues facing UK productivity. In particular, tackling the UK’s relatively high levels of labour inactivity across over-50s could provide a notable increase in growth in a relatively short period of time.”

Inflation is past its peak

The report forecasts inflation as measured by the CPI to begin to significantly decrease over coming months and return to the Bank of England’s target of 2% by the end of 2024. Despite this, however, inflation may remain higher in certain key areas - such as food and services - and this may mean the cost of living pressures will continue to be experienced differently across households. 

Gora Suri, economist at PwC, says:

“The key drivers of inflation have been energy, food and, to a lesser extent, supply chain disruption. While energy price inflation is starting to ease, food price inflation remains at a multi-decade high and this puts pressure on consumer spending, especially in the services sector. 

“So while the headline CPI rate will fall, prices will cumulatively be one fifth higher by the end of next year compared to the start of 2021. This will inevitably affect those on lower incomes, or who have seen smaller wage growth, significantly more than others and will have divergent impacts on consumer spending patterns in a highly polarised recovery.”

All regions will report growth

All of the UK’s nations and regions have reported growth in the three months to February, led by London (0.9%) and Northern Ireland (0.6%). Growth, however, was slower across the North of England and Midlands, partly due to ongoing post-pandemic issues affecting the manufacturing sector and related supply chains.

Notes to editors:

1. For more information or to request an interview with a PwC economist please contact david.bowden@pwc.com