Consumers will also feel pressure from higher oil prices, the combination of frozen income tax thresholds and still-high inflation, and a deteriorating labour market. Unemployment is now forecast to peak at 4.8% next year, up from July’s forecast of a 4% to 4.5% peak in 2023.
Taking these supports and pressures into account, consumer spending is now expected to grow 0.7% this year (an upgrade from the flat 0% expected in the Summer Forecast), another 0.7% in 2024 (slightly up from 0.6%) and 1.7% in 2025 (no change).
Martin Beck, Chief Economic Advisor to the EY ITEM Club, adds: “While recent industry surveys have been fairly gloomy about the UK economy, there have been enough positive developments, including upwards revisions to past data, to lift the mood music and reduce the danger of recession becoming a self-fulfilling prophecy. There are still prominent risks to the forecast though, including potential volatility in both oil and gas prices and tighter financial conditions. And, with an election approaching, the future path of government fiscal policy isn’t clear beyond 2025, presenting a significant unknown to the longer-term forecast.”
The EY ITEM Club continues to expect house prices to fall by around 10% from their highest to lowest points, with a flatlining expected in 2023 before a 4% fall in 2024 as high borrowing costs apply downward pressure on demand. The market is still expected to avoid a serious price correction, helped by forbearance from lenders and the fact that the ratio of house prices to average incomes has fallen.
Business investment continues to offer encouragement
The EY ITEM Club notes that business investment grew significantly in the first half of 2023, but that high interest rates and a low-growth economy mean the recent pace of investment growth is unlikely to be sustained. Nonetheless, given the strength of the improvement at the start of the year, the EY ITEM Club has upgraded its 2023 business investment growth forecast to 5.9% from the 1.4% growth expected in the Summer Forecast. This would be the fastest rate of growth since 2016, excluding the post-pandemic bounce back seen in 2022.
The EY ITEM Club adds that, despite higher interest rates, deleveraging by UK companies and relatively limited refinancing needs for market-based debt suggests that, on the whole, UK companies won’t face serious financial stress. The EY ITEM Club expects a modest fallback in investment in 2024, with a contraction of around 0.5%.