UK economy tipped to shrink 0.4%

BRITAIN’S economy is on course to shrink 0.4 percent next year as inflation remains high and companies put investment on hold, with gloomy implications for longer-term growth, the Confederation of Business Industry forecast yesterday.

“Britain is in stagflation — with rocketing inflation, negative growth, falling productivity and business investment. Firms see potential growth opportunities but ... headwinds are causing them to pause investing in 2023,” CBI Director-General Tony Danker said.

The CBI’s forecast marks a sharp downgrade from its last forecast in June, when it predicted growth of 1.0 percent for 2023, and it does not expect gross domestic product to return to its pre-COVID level until mid-2024.

Britain has been hit hard by a surge in natural gas prices following Russia’s war of Ukraine, as well as an incomplete labor market recovery following the COVID-19 pandemic and persistently weak investment and productivity.

Unemployment would rise to peak at 5.0 percent in late 2023 and early 2024, up from 3.6 percent currently, the CBI said.

British inflation hit a 41-year high of 11.1 percent in October, sharply squeezing consumer demand, and the CBI predicts it will be slow to fall, averaging 6.7 percent next year and 2.9 percent in 2024.

The CBI’s GDP forecast is less gloomy than that of the British government’s Office for Budget Responsibility — which last month forecast a 1.4 percent decline for 2023.

But the CBI forecast is in line with the Organization for Economic Cooperation and Development, which expects Britain to be Europe’s weakest performing economy bar Russia next year.

The CBI forecast business investment at the end of 2024 will be 9 percent below its pre-pandemic level, and output per worker 2 percent lower.

To avoid this, the CBI called on the government to make Britain’s post-Brexit work visa system more flexible, end what it sees as an effective ban on constructing onshore wind turbines, and give greater tax incentives for investment. “We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity,” Danker said.

Meanwhile, euro-zone business activity declined for a fifth month in November, suggesting the economy was sliding into a mild recession as consumers cut spending amid surging inflation, a survey showed.

S&P Global’s final composite Purchasing Managers’ Index for the eurozone, seen as a good guide to economic health, nudged up to 47.8 in November from October’s 23-month low of 47.3, matching a preliminary estimate.

“A fifth consecutive monthly falling output signalled by the PMI adds to the likelihood that the eurozone is sliding into recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

“However, at present the downturn remains only modest, with an easing in the overall rate of contraction in November means so far the region looks set to see GDP contract by a mere 0.2 percent.”

“Britain is in stagflation — with rocketing inflation, negative growth, falling productivity and business investment.

Tony Danker CBI Director-General