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Positive Economic Outlook: Renewed Prosperity and Promising Growth Opportunities
In our latest update, the global and domestic economic environment paints a promising picture, offering renewed prosperity and growth opportunities for the UK economy. Several factors have contributed to this positive outlook, including sustainably lower natural gas prices, a stronger Sterling, and the successful re-opening of the Chinese economy.
UK Economy Avoids Recession:
Thanks to these favorable conditions, we expect the UK economy to avoid a recession and grow by approximately 0.1% in 2023. Our base case scenario assumes a return to more normal domestic and international conditions with low policy uncertainty and no geopolitical flare-ups.
Potential Risks and Mitigations:
While the outlook is optimistic, we acknowledge potential risks that could impact growth. In our downside ‘prolonged damage’ scenario, inflation remaining stubbornly high due to geopolitical developments or other factors could lead to a contraction of around 0.9% in economic activity this year. However, our projections indicate that this is less likely.
Inflation Expected to Subside:
We anticipate a sharp decline in inflation throughout the year, reaching single-digit figures by the middle of the year and settling around 3-4% by year-end. The drop in energy and goods prices, along with softer tradable goods inflation, will contribute to this decline. As financial conditions tighten, their impact on economic activity is also expected to become more evident in the coming quarters.
Long-term Impact on Households and Businesses:
The recent inflationary episode has left a lasting impact on UK households and businesses, with consumer prices estimated to have risen by at least 20% cumulatively since the beginning of the episode until inflation returns to the Bank’s target range.
Addressing Economic Inactivity:
Despite the economic recovery, economic inactivity remains elevated, driven primarily by health reasons and other factors related to the pandemic. Looking ahead, the UK economy is likely to face a broader challenge posed by population aging, which is expected to drive economic inactivity higher in the coming decades. Policymakers must focus on increasing workforce productivity, and businesses should define recruitment strategies and offerings to cater to a wider demographic.
In conclusion, the current economic environment presents promising opportunities for the UK economy. With the right policies and strategies in place, the country can embrace this positive outlook, fostering stability, growth, and resilience for a brighter and prosperous future.