UK recession could be twice as bad as previously expected

recession  A worker walks past freshly galvanised pieces of metal inside the factory of Corbetts The Galvanizers in Telford, Britain, June 28, 2022. REUTERS/Phil Noble
Economists say the UK is expected to hit recession this year. Photo: Phil Noble/Reuters

The UK's impending recession could be deeper than previously thought but not longer, according to economists at consultancy EY.

Faced with a worsening situation, less government support and higher taxes, the economists said they thought each of the next three years could be worse than they had previously expected.

In October, EY’s Item Club had predicted a 0.3% contraction in gross domestic product (GDP) this year, followed by 2.4% growth next year and a 2.3% rise in 2025.

But in an updated forecast released on Monday, it said GDP would drop 0.7% this year, followed by growth of 1.9% and 2.2% over the next two years.

“The UK’s economic outlook has become gloomier than forecast in the autumn, and the UK may already be in what has been one of the mostly widely anticipated recessions in living memory,” said EY’s UK chair Hywel Ball.

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EY said that while the recession might cut deeper than it formerly thought, it will not necessarily last longer than the previous forecast.

It is still unclear whether the country is already in recession. A recession is defined as two quarters of consecutive GDP contraction.

Recently, Bank of England governor Andrew Bailey said the pandemic and the cost of living crisis meant a recession was still a possibility.

Bailey warned the most likely outcome for the UK economy was a long, shallow recession with a pattern of “weak activity over quite a prolonged period”.

The economy already shrank in the third quarter of last year. But GDP figures released last week showed that the economy unexpectedly grew in November, meaning some economists think the fourth quarter might be positive.

“The one silver lining is that, despite being a deeper recession than previously forecast, it won’t necessarily be a longer one,” Ball said.

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The recession will probably also prove less damaging for the economy than those in the 1980s, 1990s and 2000s, EY said.

“The economy is still expected to return to growth during the second half of 2023 and has been spared any significant new external shocks in the last three months from energy prices, COVID-19 or geopolitics. Meanwhile, the chief headwind to activity over the last year ⁠— high and rising inflation ⁠— may be starting to retreat, while energy prices are falling too.”

Watch: What is a recession and how do we spot one?