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UK in recession until end of 2023, CBI warns

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
Recession: The CBI boss warned most businesses are going into 2023 'not really sure what to do'. Photo: Phil Noble/Reuters (Phil Noble / reuters)

The UK will be in a recession until the end of 2023 as triple whammy of high inflation, low growth and weak investment by businesses weighs down the economy.

The Confederation of British Industry (CBI) has slashed its forecast for growth in 2023, and predicts that UK GDP will shrink by 0.4% next year, down from 1% growth previously expected.

Although long, the recession is likely to be less severe than previous hits such as in 2008, and even the early 1990s recession.

Tony Danker, CBI director general, said that the UK is suffering stagflation: “Britain is in stagflation ⁠— with rocketing inflation, negative growth, falling productivity and business investment. Firms see potential growth opportunities but a lack of 'reasons to believe' in the face of headwinds are causing them to pause investing in 2023. Government can change this.

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Read more: Brexit, low demand and high costs hit UK manufacturing

“Their action or inaction to support growth and investment will be a key determinant of whether recession is shallow or deep.”

Business investment is expected to be 9% below pre-COVID pandemic levels by the end of 2024 — equivalent to about £5bn.

The CBI, which represents 190,000 UK businesses, warned productivity would remain weak over the next two years, ending up about 2% below pre-pandemic trends at the end of 2024.

“We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity,” Danker added.

Although the CBI believes inflation peaked at 11.1% in October, it predicts it will remain significantly above the Bank of England's 2% target throughout 2023, ending the year at 3.9%.

The cost of living in the UK is rocketing at rates not seen for decades (Yahoo News UK/Flourish)
The cost of living in the UK is rocketing at rates not seen for decades. Chart: Yahoo News UK/Flourish

The upcoming recession will probably be shallow, but will still be tough for households and businesses.

“Another recession in the space of two years is tough going. A second year of high ⁠— albeit falling ⁠— inflation will hit households hard, especially those lower down the income distribution. With cost pressures remaining high, many businesses will also be operating in a tough trading environment,” Alpesh Paleja, CBI lead economist, said.

“While it’s some consolation that the upcoming recession will be shallow, it’s concerning that longer-term weakness in productivity and business investment appears to be bedding in. It does not bode well for living standards and the economy’s capacity to grow over the longer-term,” he added.

Danker said the UK must "start taking action" on investment if it is going to avoid a recession that is "longer and deeper than it needs to be".

Read more: Cost of living: Minimum wage rates leave under 21s out of pocket by £2.5bn

He told BBC Radio 4's Today programme: "If we're going to avoid this recession being longer and deeper than it needs to be, then we need to start taking action the prime minister himself recommended earlier in the year.

"We have to start to take these seriously... or we're not going to change that pattern of low business investment."

The CBI boss warned most businesses are going into 2023 “not really sure what to do”, thinking “there may be some growth left in the economy” but “all the headwinds” are telling them they should “plan for recession”.

The CBI forecast that the UK’s overall outlook would improve in 2024 with economic growth of 1.6%.

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