The Bank of England could halt interest rate hikes next year as the cost of living crisis hits the UK with a ‘mild recession’.
- KPMG expects the UK economy to grow 3.2% this year, compared to 7.4% in 2021
- In 2023, GDP growth could slow to just 0.7% in its main scenario
- But the economy could contract by 1.5% if spending slows and the EU and US shrink
- BoE sees hike rates in August and November but halts hike cycle in 2023
The cost of living crisis could push the UK into a mild recession next year, prompting the Bank of England to halt interest rate hikes, a new report says.
Accounting giant KPMG said its main scenario could see UK economic growth slowing to just 0.7 percent by 2023 as higher borrowing costs put pressure on businesses and consumers.
However, should consumer spending slow further and the EU and US fall into recession of their own, a “slight” slowdown could be a “typical possibility”.
Cost of Living Crisis: Consumers are expected to cut back on non-essential spending
In this vulnerable scenario, the UK economy will contract by 1.5 percent between the third quarter of this year and the third quarter of 2023, with consumer spending falling by 1.9 percent.
KMPG also halved its growth expectations for this year – it now expects GDP growth of 3.2 percent in 2022 compared to 7.4 percent in 2021.
“A sharp slowdown in the external environment – leading to a slowdown in some of the UK’s key trading partners – coupled with a sharp fall in UK consumer spending could see the UK economy, with manufacturing and financial services, entering a mild recession next year. One of the hardest hit sectors,” says KPMG’s latest UK Economic Outlook report.
Recession concerns are being voiced by a growing number of economists who have predicted the US economy could contract if the Federal Reserve hikes interest rates to curb inflation.
Europe’s economy also appears to be slowing as rising energy prices hit consumers and businesses.
With UK inflation hitting a 40-year high of 9.1 percent, consumers are becoming more cautious about their spending as their finances tighten.
Last week, official data showed that retail sales fell 0.5 percent in May as Britons restricted their groceries.
“Slight” slowdown: According to KPMG’s less optimistic scenario, the UK economy is likely to contract by 1.5% between the third quarter of this year and the third quarter of 2023.
“The cost-of-living crisis and rising tax burden have led to a decline in consumer confidence, which will weigh on discretionary spending,” the report said.
“Business investment is expected to be particularly weak next year without government support.”
As the recession looks more likely, KPMG expects the Bank of England to halt its rate-hike cycle in 2023, leaving rates on hold at 1.75 percent after two more hikes in August and November.
“The policy committee needs to balance the risk of higher inflation in wage growth against the risk of a recession,” the report says.
‘Faced with such trade-offs, we think it is likely that the dove on the committee will shift the balance towards a more gradual uptrend, which is currently the price of the markets’.
The median salary is up 12% cumulatively since 2020, while home prices are up 21%
KPMG also said the housing market may experience a slowdown due to the “rapidly declining affordability” of homes.
“Since the beginning of 2020, nominal household income has no longer matched house prices,” it said.
There was a 12 percent increase in median wages versus a 21 percent increase in average house prices.
‘In addition, higher mortgage rates will increase the cost of repaying loans, reversing the downward trend seen over the past decade.’
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