As we enter the start of 2023, the UK finds itself on the verge of recession, as households and businesses face increasing pressure in the cost of living crisis, with inflation at its highest since the 1980s.
Earlier this month, the Bank of England warned of a prolonged recession ahead, as families contend with the rising costs of energy, food and other essentials.
In this article, we’ll be taking a look at the UK economy timeline for 2023, offering some predictions for what we can expect in the year ahead.
Inflation
It is anticipated that inflation will fall from its current peak levels.
The UK entered 2022 with inflation above 5%, following the coronavirus pandemic when many businesses either closed or operated on reduced hours, causing severe problems in the supply chain.
Russia’s invasion of Ukraine added to the rise in inflation even more, with energy costs soaring for businesses and consumers, reaching a peak of 11% in October.
Fortunately, many economist experts predict that inflation will start to decline gradually towards the end of the year once the initial shock from the invasion fades.
However, it is important to note that lower inflation rates don’t necessarily mean lower prices. Living costs will likely remain much higher than pre-Covid levels, and energy bills are expected to stay at more than double historical levels- even after the government’s energy price guarantee.
GDP
In the lead up to 2023, economic activity slowed rapidly as consumers reduced their spending as a result of the cost of living crisis. What’s more, business investment also decreased amid concerns over the UK and global economy.
Britain is the only G7 economy that still has gross domestic product (GDP) below the pre-pandemic levels. The Bank of England predicts the recession to continue until the end of the first half of 2024, before eventually making a gradual recovery.
These high energy prices are likely to impact spending activity, and higher borrowing costs will also slow it down following sharp rate increases from the BAnk of England. Investment will remain low, with added pressure from Brexit red tape and greater costs for exporters.
Employment
Unemployment is expected to rise as the economy slows.
The economic delice is expected to drive unemployment, as lessened consumer and business spending plus higher costs force employers to make tough decisions when it comes to staffing levels.
The good news is that the forecasts for a rapid rise in unemployment occurs at the same time companies are finding it difficult to find enough workers. Despite employers responding with increased wages and annual pay growth near 6%, this is still below double-digit inflation, which means real-terms pay cuts for many.
The public sector continues to strike, with the government refusing to budge on pay.
House Prices
The pressure on household finances from the cost of living crisis was exacerbated by an increase in mortgage interest rates, as the Bank of England announced a rise in borrowing costs- over 5 times its official 2% target rate.
2022 ended with a 3.5% base rate, up from 0.25% in January 2022. The financial markets expect these rates to peak above 4% in 2023, although the central bank may stop the rises before this occurs.
These increased costs will make their way through the property market as families remortgage at higher rates. With rising unemployment and slowed economic activity, experts expect a steep decline in house prices in 2023.
Public Finances
Following Liz Truss’ disastrous mini budget, Jeremy Hunt strived to win back investor confidence by using the Autumn budget to lay out tight spending settlements and raising more through tax.
Despite this, public borrowing is set to increase significantly in 2023 as the government provides more support for businesses and households struggling with energy bills.
The shortfall between spending and income, known as the budget deficit, is expected to reach £177bn before the end of March this year- nearly £40bn more than last year- before slowly falling over the next few years.
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