THE ECONOMY IN 2023 HOW CONCERNED SHOULD YOU BE?

It’s been well-documented that the UK will be in recession during 2023, with other economies around the world also expected to suffer the same fate. Record inflation and high-interest rates continue to make the trading environment tough, whilst lockdowns in China are having a knock-on effect to the global economy. But is the economic outlook for 2023 as bad as first thought? We spoke to several experts to give an indicator of what you can expect this year.

HOW BAD WILL THE UK RECESSION BE?

The independent Office of Budget Responsibility (OBR) has warned that the UK is currently in recession and will remain so for the whole of 2023, with the UK economy contracting by 1.4% over the course of the year. A similar-sized contraction is supported by Goldman Sachs’ macro-outlook for 2023, which says there will be a shrinkage of 1.2%. Significantly, however, this figure is well below the other G-10 major economies, with the UK only marginally ahead of Russia, whose economy is expected to shrink 1.3% in 2023. Germany, with a contraction of 0.6%, is the next worst performer among major economies, according to the report.

Goldman Sachs also expects the UK economy to expand by 0.9% in 2024, with Russia and Germany’s economies growing by 1.8% and 1.4% respectively during this time. With the Organization for Economic Cooperation and Development also forecasting that the UK will lag significantly behind other developed nations in the coming years despite facing the same macroeconomic headwinds, there appears to be tough times ahead for the country.

However, according to Andrew Hodgson, Senior Partner, Corporate Finance at KPMG, such an outlook is not so bad when put in the context of past recessions.

He comments: “We think the UK economy is in the midst of a relatively shallow but protracted recession. Overall GDP is expected to fall by 1.7% from peak to trough, followed by a partial recovery in 2024. Despite this, the size of the UK economy will still be below its pre-pandemic level at the end of 2024. But, while the duration of the current downturn may be relatively long, the drop in activity is expected to be mild by historical comparisons.”

IS ENOUGH BEING DONE TO IMPROVE THE ECONOMIC OUTLOOK?

Although 2023 might not be a year of economic despair by historical standards, it’s significant that the UK is expected to be one of the worst-hit major economies. This begs the question of whether enough is being done to mitigate the recession. The Bank of England has continuously raised interest rates as it attempts to tackle high inflation, taking them to 3.5%, the highest point in 14 years. But this appears to be in vain, so could the government do more to help bring them down?

According to Hodgson, the government does not have much power to alter interest rates.

He comments: “Market interest rates are determined by a range of factors: independent monetary policy, risk premia, and the balance between supply and demand for debt. The government has only a limited role in influencing interest rates. Political stability recently has helped bring down uncertainty and reduce gilt yields in the aftermath of the mini budget. But monetary policy will likely remain tight for the foreseeable future to counteract the effects of persistently high inflation. In addition, quantitative tightening (reversal of the Bank of England’s purchases of government debt in the form of QE) increases the supply of gilts and reduces demand, pushing up gilt yields.”

High-interest rates are not the only challenge the UK economy is currently contending with, however. Inflation is at 10.7%, meaning it remains near a 40-year high, but Hodgson believes this could be alleviated by quickly resolving the conflict in Ukraine or a persistent improvement in supply chain pressures.

He continues: “And with a tight labour market, we think that unemployment could remain relatively low, providing important support to incomes. In the short run, government support will continue to mitigate the direct hit, but fiscal space is already limited after a prolonged period of pandemic-related spending. As such, the government will probably want to limit the amount of support before it causes it to miss fiscal targets that are already very stretching.”

However, Russ Shaw CBE, founder of Tech London Advocates & Global Tech Advocates, says adequate government support for the tech industry is key for generating growth in 2023.

He comments: “Rishi Sunak’s commitment to supporting innovation across the UK is vital. Increasing public funding towards R&D in sectors, such as AI and green tech, signal that the government is willing to invest in the future success of the UK economybut more has to be done to protect the sector and the economy.

“With the capital holding firm as Europe’s leading tech hub, and flourishing regional hubs such as Bristol, Manchester and Birmingham going from strength to strength - the UK tech industry is well positioned to be a catalyst for growth across the whole economy if the government creates the right environment for the sector. Tech businesses are finding it increasingly hard to find and retain top talent, due to the tech skills shortage which costs the economy an estimated £63bn a year in potential GDP.

“To support the UK tech sector and business more broadly, the government will have to increase investment in digital skills training. The UK also needs to double its effort to strengthen ties with major economies, such as India, to create new trade opportunities. With a holistic economic strategy that makes the most of the UK’s strengths, the goal of creating sustainable growth can come within reach even during these uniquely challenging times.”

The Global Outlook

Although 2023 looks especially tough for the UK, the global outlook does not appear much better. The International Monetary Fund (IMF) is expecting a third of the world to fall into recession this year, with the firm’s Head, Kristalina Georgieva, saying 2023 will be “tougher” than last year as the US, EU and China see their economies slow and that it will feel like a recession for millions of people living in countries that are not in recession too. According to the World Bank’s Global Economic Prospects Report, the global economy is also “perilously close to falling into recession,” and will grow by just 1.7% this year, which is the lowest growth figure since 1991.

CBE

Dr Maria Paola Rana, Lecturer in Economics and Finance at the University of Salford Business School, says this report also confirms the risk of a second global recession within three years. She elaborates: “Forecasts for 2023 have been revised down for 95% of advanced economies and almost 70% of emerging and developing economies. Growth in advanced economies, in fact, is forecasted to decelerate from 2.5% in 2022 to 0.5% in 2023. While growth in emerging and developing economies (excluding China) is expected to slow from 3.8% in 2022 to 2.7% in 2023.

The World Bank has also expressed particular concern for developing and emerging economies, stating ‘weakness in growth and business investment will compound the already-devastating reversals in education, health, poverty, and infrastructure and the increasing demands from climate change’.”

Rana says this means we could expect the UK to not be an exception when it comes to a tough 2023.

“If anything, the UK economy has additional reasons for concern, such as Brexit-related issues, including even higher inflation and tougher monetary policy, persistent high energy prices, further lockdowns in China, and the possibility that geopolitical tensions escalate,” concludes Rana.

However, Hodgson says a global economic slowdown will have implications for the UK.

He comments: “The global markets have already had a tough 2022, with growth slowing and financial conditions tightening. As a small open economy, the UK is not immune to the slowdown in the global economy. For example, UK exports are particularly sensitive to demand from our main trading partners, which is enough to outweigh any benefits from the weaker currency. Higher uncertainty about global prospects will also depress business confidence and keep a lid on investment.”

CHINA’S GLOBAL IMPACT

One of the reasons for the slowing global economy is China’s response to Covid-19. China previously had a strict lockdown policy, but now that they’ve eased lockdown restrictions, there have been reports that hospitals in the country are under pressure due to Covid-related hospitalisations. According to UK-based research company Airfinity, its model estimates cases in China could reach more than three million a day in the first few months of 2023.

Dr Rana comments on the effects of this policy. She says: “Since China is the major producer and exporter of consumer goods in the world, the surge of Covid-19 infections the country is currently experiencing, due to recently lifting the strict restrictions the country had in place, will disrupt the Chinese manufacturing sector even further - at least in the short-term. This is likely to have a further impact on the global supply chain and, subsequently, on the global economy.”

Hodgson elaborates on this: “China is highly integrated into global supply chains. Shortages of even small components can cause bottlenecks and hold up production processes. This is, in turn, driving up inflation. For example, we’ve seen in the UK that a shortage of semiconductors for new cars has resulted in a spike in the price of second-hand cars. Global supply chain pressures have eased recently, although a combination of geopolitical and Covid-related risks mean they are likely to remain a background issue.”

Dr Maria Paola Rana

The latest data from XpertHR shows that pay awards are worth a median five percent in the three months to the end of December 2022. This is equal to the previous month’s figure and more than double that recorded in the same period in 2021 (2.3%). The gap between pay settlements and inflation remains substantial and will likely continue to be so over the coming 12 months.

The Consumer Prices Index rose by 10.7% in the 12 months to November 2022, slightly down from 11.1% in October, which marked a 41-year high. More than a quarter of all pay reviews take effect from January each year and whilst it is unlikely that pay will rise substantially in the coming months, the latest data shows that neither is there any sign of settlement levels dropping to where they were in the same period last year.

Because of China’s importance to the global economy, their response to Covid in 2023, particularly over the winter months, could be an integral factor when it comes to improving economic outlooks around the world. However, the UK has its own problems to contend with in 2023, and although the incoming recession does not appear to be one of the worst on record, the UK needs to do more if it wants to avoid falling further behind the other major economies in the years ahead. 