HSBC Head Economist Mark Berrisford-Smith
No recession after all: economic outlook for the UK during the remainder of 2023
Latest Economic commentary from HSBC Head Economist Mark Berrisford-Smith
Key points
Economic conditions in the UK have improved since the start of the year, thanks to lower commodity prices, particularly for natural gas. As a result, the UK is no longer expected to experience a recession.
For 2023 as a whole, the UK’s GDP is now forecast to expand by 0.4%, as against the contraction of 0.6% that we expected back in January. But the recovery will be anaemic, held back by several factors, including the steep increase in borrowing costs, the ongoing tightness of the labour market, a stagnant housing market, and rising rents for individuals.
Despite a surprisingly-high inflation figure for February, the headline inflation rate is projected to fall sharply throughout this year as 2022’s big increases in food and energy costs fall out of the annual calculation. But the tightness of the labour market will hold inflation above the 2% target throughout 2024.
HSBC believes that the Bank of England’s base rate has now peaked, though the decision in May could still be a close call. With “core” inflation proving sticky, no rate cuts are anticipated before the end of next year.
HSBCs previous economic forecast for the UK, issued back in January, suggested that 2023 would be a “getting better sort of year”. So far, that assessment has proven to be correct, and indeed the short-term outlook has brightened further in the past few months, to the point that the UK now looks set to avoid slipping into a recession.
In truth, the recession that had been forecast was expected to be shallow, with the level of economic activity projected to contract by around 1%. Nonetheless, the “R” word has a power all of its own, and the simple fact that a recession is no longer on the cards will help to boost confidence among both households and businesses.
The cause of the improved economic outlook for the UK, as for most other major economies, is that prices for commodities, especially natural gas, have continued to fall. They are still nearly 50% up on where they were before the Covid pandemic, but are more than a third down from the peak reached last August.
Especially important for the future trajectory of gas and electricity prices is the fact that the benchmark Dutch TTF price for natural gas has stabilized at a little over €40 per megawatt hour. This is still between two and three times what would have passed for normal before the build-up to the war in Ukraine, but is an eighth of what it was last August, and a fall of 60% from the average price in December.
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