Economy Update: Why The UK Will Not Be Heading Into A Recession This Year
By David Pritchard
Recently on our podcast, A Dab of Investment, I talked about the scary R-word: recession.
Over the last 18 months, we’ve witnessed quite a difficult turn of events – the war in Ukraine, rising energy costs, increased interest rates and, of course, inflation. As a result, many organisations, including the IMF and the Bank of England, predicted that the UK would enter into a recession this year.
But is that still the case? Let’s find out.
The state of play within the UK
The UK is certainly having a tough time in some respects. For example, extra mortgage rates and increasing rents have become a cause for concern. Most homeowners are beginning to feel the pinch as mortgage rates have gone from between 1.5 and 2.5 per cent to over six per cent!
However, despite these problems, the UK economy looks likely to sidestep recession this year. The big question here is: why?
Why the UK isn’t in a recession
Over the last couple of months, Alex and I have spoken to every fund manager in the UK, and the general consensus is that we’re still spending the wall of money that we all saved up during the pandemic.
Here’s how it works.
A large part of our economy is based on consumer spending – whether it’s in a bar, a hotel, or even people going on holiday. After the pandemic, most people realised that they missed regular human interactions. Obviously, this led to a spike in the demand for holidays and other leisurely activities.
But, that’s not all. European wholesale gas prices have fallen drastically over the past couple of months. This should lead to lower energy bills for businesses and households, easing financial pressure and giving them extra cash to pump back into the economy.
These recent shifts, particularly in energy costs, have caused the IMF and the Bank of England to make a U-turn on their earlier forecasts.
Ultimately, buoyed by resilient demand from consumers and businesses (as well as lower energy prices), the UK economy is expected to dodge a recession this year.
The American economy
While the UK economy isn’t heading into a recession, the American stock market does give us some concern. Following the 2023 banking crisis where three small to mid-sized US banks failed in quick succession, all of the US lenders have tightened their lending criteria.
This means that it’s now significantly harder for businesses and companies to borrow funds to grow in the US, which could impact interest rates and economic activity in general.
The forecast for the rest of the year
Having established the state of play within the US, let’s turn back to the UK economy and what to expect for the rest of 2023. By the end of the year we predict inflation should be lower and interest rates should have peaked.
In 2024, we expect to see interest rates drop significantly. As inflation eases and gets back under control, the Bank of England will likely bring interest rates down. While this slash may not happen immediately, a fall in inflation could mark the end of rising interest rates.
In conclusion, the economy is holding up surprisingly well and there’s still an opportunity to make decent returns on your investments because of the profits generated by some companies here in the UK.
For useful insights as to the state of the market and risks of recession – including more detail on why the UK market is in a good place – why not listen to our podcast A Dab Of Investment?
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.
The value of your investment can go down as well as up, and you may not get back the full amount invested.
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