Key themes 2023 – Recession ahead but UK policy pivot unlikely

We expect the UK economy to be in recession for most of 2023, with activity dragged down by falling real household income and tight policy settings. We’ve identified three key themes that will influence the scale of the 2023 downturn and the pace of the subsequent recovery.

What you will learn:

1. The government will maintain a tight fiscal stance. We estimate the drag on the economy from policy changes will be large – equivalent to 2.6% of GDP in fiscal year 2023-2024. With the new regime prioritising fiscal prudence and the scars of ‘Trussonomics’ still fresh, the bar to providing more support to squeezed households is likely to be high.
2. The BoE will end its hiking cycle but not switch to rate cuts. With fears of a wage-price spiral receding, we expect the MPC to stop hiking Bank Rate when it reaches 4% in early-2023. But inflation is set to prove sticky and labour supply will be slow to recover, so we expect the MPC to be reluctant to pivot towards rate cuts unless the recession proves much deeper than we forecast.
3. Residential and commercial real estate prices will correct. Both markets will enter 2023 heavily overvalued, and the scale of price falls next year will depend on the extent of forced sales. A low peak in unemployment and the high prevalence of fixed-rate mortgages make us less pessimistic about the residential market. But retail and office markets face large refinancing shortfalls, and interest coverage ratios are looking dangerously low.