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Economic update

We take a look at the state of the UK economy at the beginning of 2023.

 

1) What is the current state of the global economy?

The global economic outlook looks slightly more upbeat than we previously envisaged; we have upgraded our 2023 global growth forecast by 0.2%pts to 2.4%. The relaxation of China’s strict zero-Covid policy has boosted growth prospects, while the warmer weather in Europe has helped temper the intensity of the energy crisis. That said, we still face a challenging year. Not only are geopolitical tensions ongoing, but the lagged effect of higher interest rates is likely to take its toll on economic momentum this year. News on inflation, meanwhile, has been more encouraging as of late, with headline inflation falling in many of the major economies, albeit from an extremely high base. We expect this to continue this year. A return to target inflation, though, will take longer.

2) Is the UK in recession?

Whether the UK already entered recession in Q4 2022 is a borderline case. Most probably it did, but by a whisker. The loss of momentum is, however, clear. We expect larger contractions in output in Q1 to Q3 – and so formally a recession – this year. Interest rates have been hiked faster than in any other tightening cycle since the Bank of England started targeting inflation in 1992. Along with the effects of the cost-of-living squeeze on households, this stands to reduce activity because much higher corporate funding costs disincentivise investment.

3) What can we take from the latest Bank of England base rate decision?

The Monetary Policy Committee had to balance what is still far above target inflation now, with no certainty that it is on the required path, against greater optimism that a sustained and decisive downward trend has begun. It settled on a further rate hike, of +50bps. The key point is that, with rates now firmly in restrictive territory, the end of the monetary policy cycle is drawing nearer, in our view: we expect the Bank rate to peak at 4.25% next month. Weaker activity stands to constrain inflation, as do lessened energy price pressures and an easing in global supply chain disruptions now that China has dropped its zero-Covid policy. Indeed, the improved inflation outlook may allow the Monetary Policy Committee to start cutting rates again by the end of the year.

4) What other events should we be looking out for?

Policymakers will be keeping a close eye on labour markets. These remain historically very tight and will need to loosen – through higher unemployment and/or rising labour force participation – for central banks to feel confident the battle against inflation is being won. This will be key in determining how soon rates could be cut.

 

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Important information:

Investec Bank plc provides this media for information purposes only. No reliance can be placed on its content and Investec Bank plc does not accept any liability or responsibility directly or indirectly for any losses as a consequence of consuming this media. You should always seek independent professional advice before making any financial or investment decision.

Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change.