The annual Times economists survey, now in its sixth year, paints an uncertain picture for the UK and global economy in 2023, a year likely to be dominated by war, global political trade tensions and the battle to bring down inflation.
Britain is on course to be among the worst-performing of the world’s big economies this year, falling further behind its pre-Covid peak three years after the pandemic struck.
The 40 economists who took part in the survey were drawn from the City, academia and think tanks and provided their forecasts after the Bank of England’s last rate rise of the year in December.
Looking ahead, the global economic policy debate will be dominated by how far central banks keep raising interest rates after a record year for monetary tightening. There were 54 rate rises across the global economy last year, with unprecedented synchronised action by the Bank, US Federal Reserve and European Central Bank.
Interest rates
More than half the surveyed economists thought the Bank’s monetary policy committee would have to raise rates from 3.5 per cent at present to a range of between 4 per cent and 5 per cent this year, in line with money market pricing.
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Jagjit Chadha, director of the National Institute of Economic and Social Research, said the committee would need to “nudge” rates to a higher rate than inflation. “The key here is to nudge and move sensitively to emergent data on the economy, which is both fragile and heavily indebted,” he said.
At its December meeting, the committee slowed the pace of rate rises to 50 basis points, with two members voting for no change, marking a more doveish approach than either the Fed or the ECB.
Respondents were split on how far the Bank would need to move into restrictive territory. Andrew Brigden, chief economist at Fathom Consulting, said inflation would end the year above 6.5 per cent, higher than the Bank’s forecasts, and would force the committee into raising rates further than investor expectations.
Just over 15 per cent of economists said the Bank rate would be maintained at 3.5 per cent or even would fall to 3 per cent as the economy stalled. John Philpott, a labour market economist, expected the committee to start easing monetary policy by the end of the year in the face of “deflationary pressures”. Alfie Stirling, chief economist at the New Economics Foundation, said rate rises had already gone too far “and should stabilise or fall in 2023”.
After a year of co-ordinated tightening, 2023 could give way to the first signs of central bank divergence. Eighty-five per cent of surveyed economists expected the Fed to carry out at least another two interest rate rises this year after repeated warnings from Jerome Powell, its chairman, that investors were underestimating the path of monetary policy.
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After a late start to its tightening, the ECB may emerge as the most hawkish of all rate-setters in 2023. Just over half of those surveyed projected a minimum of three rate rises in the eurozone this year, with no respondent expecting rate cuts.
Growth
Britain’s growth is lagging behind that of its peers in the G7: the United States, Italy, Japan, Canada, France and Germany. The UK has been particularly exposed to the threat of inflation, which is higher than that of its peers because of Brexit, worker shortages, the slump in the pound and the impact of the global energy price shock.
Official figures are expected to confirm next month that the country entered a recession at the end of last year, brought on by a fall in consumer demand owing to the impact of inflation on the value of pay packets. It would be the third recession since the turn of the century, but it is not expected to be as deep as those that followed the 2008 financial crisis or the first coronavirus lockdown.
The global economy is expected to grow at a rate of 1 per cent to 2 per cent this year, but the vast majority of economists surveyed — 82 per cent — said the UK economy would shrink. More specifically, a majority of them expected gross domestic product, the main measure of output, to fall by about 1 per cent. “The squeeze on consumer spending from high inflation is likely to be the main factor depressing economic activity in 2023,” Andrew Sentance, a former member of the Bank committee and a senior adviser at Cambridge Econometrics, said.
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Kitty Ussher, chief economist at the Institute of Directors, said 2023 would be a “tale of two halves”, adding: “In the first part of the year, the economy will contract as higher prices reduce sales volumes and the effect of the correction in market interest rates continues to put private sector investment on hold. By the end of [the second quarter], however, falling energy prices plus base effects will lead both businesses and the Bank of England to believe that inflation is on a firm downward trend. At the same time, the uprating of benefits and warmer weather will return some greater spending power to households and all before unemployment starts to take off.”
This would create a sense of relief that we are “through the worst”, pushing up spending and investment in the second half of the year, she added.
Inflation
Economists were divided on where inflation would end the year next year, price growth having dominated the UK’s economic policy agenda since the end of the pandemic lockdowns. Annual consumer prices inflation hit its highest level in 41 years at 11.1 per cent in October, widely expected to be the peak.
The majority of respondents expected headline inflation to at least halve over the next 12 months, with 55 per cent predicting a fall from the latest reading of 10.7 per cent in November to between 3.5 per cent and 5 per cent by December 2023.
More than 40 per cent were not so optimistic, expecting inflation to remain above 5.5 per cent, which is more than double the Bank’s 2 per cent target. Fifteen per cent of respondents said inflation would fall below 3.5 per cent.
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Modupe Adegbembo, an economist at Axa investment managers, expected a “slow decline” in CPI, with high energy and food prices likely to keep the headline figure in double digits at the start of the year.
“The government’s decision to extend the energy price cap beyond March ... will help to reduce inflation over 2023 as a whole,” she said. “We expect energy inflation to gradually recede through base effects and weaker economic momentum to mute price rises in sectors such as tourism, which historically have been sensitive to the economic cycle, but the tightness of the labour market remains a key upside risk to inflation.”
Simon Wells, chief European economist at HSBC, said inflation “should have peaked in October”, but the scaling back of support with energy bills, coupled with elevated wage growth, could keep the rate high. “Inflation in food and rents is still rising,” he said.
Tighter monetary policy, coupled with an easing of supply chain disruptions, will contribute to a significant deceleration in CPI over the year, according to Gerard Lyons, chief economic strategist at Netwealth, the wealth manager. However, he added: “In all likelihood, in future years it may settle at a higher level than was the case pre-pandemic, namely 3 per cent to 4 per cent as opposed to around 2 per cent.”
Unemployment
Unemployment fell close to a historic low last year and vacancies hit a record high after more than half a million workers left the jobs market, mainly because of early retirement, sickness or taking up study over the course of the pandemic. The unemployment rate began to creep up in the autumn, in a sign that the slowing economy was reducing demand for workers. Forecasters expect unemployment to rise as a recession looms, but it is expected to remain modest in comparison with previous downturns.
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For Anna Leach, deputy chief economist at the CBI, which represents businesses, a tight labour market and the exodus of workers over the pandemic makes unemployment forecasts more uncertain. “Many companies are describing the economic downturn as an odd one, with the unusual combination of weak demand and high workforce vacancies,” she said.
House prices
Two thirds of economists surveyed by The Times expected house prices to fall by more than 4 per cent, with many expecting a double-digit decline. A fall of about 10 per cent still would not take house prices back to pre-pandemic levels.
Prices have ballooned by about a fifth since before the first lockdown as people with excess savings rushed to invest in homes and make the most of the stamp duty tax break. The climb in valuations, coupled with the rising cost of borrowing, has made homes harder to afford, particularly for first-time buyers.
“The combination of the sharp rise in mortgage rates, a continued decline in households’ real disposable incomes and low consumer confidence will prove to be toxic for house prices,” according to Samuel Tombs, chief economist at Pantheon Macroeconomics. “We expect a peak-to-trough fall in prices equal to around 8 per cent over the next 12 months, reversing around one third of the increase since the pandemic.”
Vicky Pryce, chief economic adviser at the Centre for Economics and Business Research, said affordability “can only get worse through 2023”, driven by onerous mortgage costs and falling real wages.
Energy prices
The global energy crisis after Russia’s invasion of Ukraine in February was the single biggest driver of high inflation in 2022.
Gas and oil prices have stabilised in recent months, with governments worldwide resorting to interventionist price-cap subsidies to protect consumers from spiralling costs. There is also growing optimism that Europe, the continent most reliant on Russian energy exports, will wean itself off Moscow’s gas supplies entirely in 2023, choosing alternative sources of energy such as liquefied natural gas and building up its storage capacity before the winter.
Almost 60 per cent of survey respondents said that Europe was in a better place to withstand another jump in energy prices in 2023 and 45 per cent expected market electricity prices to drop by 10 per cent over the next 12 months. Europe’s one-month forward gas prices fell below their prewar peak for the first time in late December.
The survey was carried out just as the Chinese authorities lifted draconian pandemic restrictions, raising the prospect of an upswing in global demand for oil and gas driven by the world’s second largest economy.
Trade wars and Brexit
Political rivalry between competing economic blocs became an unwelcome fixture of the world economy in 2022.
Although a vast majority of survey participants did not expect a full-blown trade war between the United States and China this year, many warned of the continued growth and inflationary impacts from so-called deglobalisation. Others cited simmering tensions between China and Taiwan as a big “tail risk”, coupled with a lack of a resolution to the war in Ukraine.
Sir Christopher Pissarides, a professor at the London School of Economics and a recipient of the Nobel prize for economics, said that Beijing would avoid stoking conflict with its key rivals. “China has learnt a hard lesson during the lockdowns,” he said. “They need openness for growth and their geopolitical objectives in southeast Asia will be better served if they don’t escalate relations with the US.”
Kallum Pickering, at Berenberg, noted: “Ageing population-driven labour shortages and a less-than-optimum use of global supply due to trade wars and deglobalisation will contribute to lasting excess inflationary pressures.”
Respondents were more sanguine about the lingering trade dispute between Britain and the European Union, a majority projecting a resolution to the diplomatic deadlock over the workings of the Northern Ireland protocol.
Rishi Sunak and the European Commission have made conciliatory noises about finding common ground on the agreement, which is designed to prevent border checks between the Republic of Ireland and Northern Ireland.
“UK economic performance would improve decidedly if the UK and EU could settle final issues around UK-EU trade and the Irish border,” Pickering said.
Ian Mulheirn, director of policy at the Tony Blair Institute for Global Change, expects that both sides will find a “face-saving, muddling-through solution”, rather than a lasting trade agreement, unless the government backs down over its red lines on the role of the European Court of Justice in the UK-EU trade deal.
“More broadly, it will become increasingly clear in 2023 how much damage Brexit has done to UK trade,” Mulheirn said.
Beyond this year, Philip Shaw, chief economist at Investec, raised the possibility of a more substantive renegotiation of that post-Brexit trade deal under a government led by the Labour Party, for which such a renegotiation “appears to be an aim”. The next election must be held before January 2025 and Labour ended last year with a poll lead over the Conservatives in excess of 20 points.
