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EY ITEM Club Forecasts UK Recession To Be Deeper

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The UK economy is set for a deeper recession than previously projected due to high inflation, falling real incomes, rising interest rates and tight fiscal policy, the economic forecasting group EY ITEM Club cautioned on Monday.

The economy is expected to shrink 0.7 percent this year, worse than the 0.3 percent contraction forecast in October, the group said in its Winter Forecast.

Growth in gross domestic product for 2024 was downgraded to 1.9 percent from 2.4 percent. Likewise, growth of 2.2 percent was expected in 2025, down from the previously forecast 2.3 percent.

The agency said the challenging outlook suggests that GDP is likely to shrink over the first half of 2023.

Nonetheless, the EY ITEM Club expects the economy to return to growth in summer 2023 and into 2024 as the weakness was caused by external factors combined with the prospect of inflation falling back quickly this year. This downturn should prove less damaging for the economy and shorter, the agency noted.

Nevertheless, the economy is not expected to regain its pre-pandemic size until the middle of 2024, the group added.

"The one silver lining is that, despite being a deeper recession than previously forecast, it won't necessarily be a longer one," Hywel Ball, EY's UK Chair said.

Further, the think tank forecast inflation to average 7.2 percent this year. Although inflation is high by historical standards, it has passed the peak at 11.1 percent last October.

Inflation is projected to fall below 4.0 percent by the end of 2023, partly reflecting recent falls in commodity and shipping prices and the reduction in the cost of wholesale gas.

Further, the agency observed that average earnings are likely to trail average inflation until next year, when earnings are predicted to grow 2.6 percent and inflation is expected to average 2.3 percent on a calendar year basis.

The EY ITEM Club expects the key interest rate to peak at 4.00 percent in the spring.

Unemployment is forecast to peak just below 5 percent in 2023. The relatively moderate rise in unemployment should help in limiting the forecast fall in house prices.

The EY ITEM Club projected house prices to fall 2.4 percent this year, with another fall of around 3 percent in 2024.

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