In light of recent developments, we are revising our short-term forecasts for UK GDP downwards, mainly due to the sudden tightening of financial conditions following the announcement of recent tax measures (which were canceled yesterday). Of course, a more growth-friendly approach to taxation and regulation levels could potentially support the UK’s growth potential in the long term. The most important changes in the forecasts are as follows: firstly, we lower real GDP for 2023 to -1.5% from -1%, and accordingly in the fourth quarter of 2022 to -1.2% from -0.8% earlier.

Now, for unemployment in 2023, we raise our estimate to 5.0% from 4.9% and in 2024 to 4.8% from 4.5%. As for inflation for 2023, we expect it to reach 5.0% from 4.9%, but we will lower our forecast for 2024 to 1.3% from 1.5%.

For its part, the Bank of England (BoE) is expected to raise the interbank rate by 100 basis points at the November meeting and by 75 basis points at the December meeting instead of 50 basis points at each meeting. This means we are raising our 2022 maturity estimate to 4% from 3.25%. However, we now expect the BoE to keep interest rates unchanged in the first half of 2023, rather than raising them another 25 basis points. With borrowing costs down 100 basis points in 2023 from 50 basis points, we maintain our end-2023 interbank rate forecast at 3%. Our estimates of lower inflation and higher unemployment largely reflect our assessment that the UK will face a deeper recession and therefore weaker demand in 2023. with two intertwined counter-forces, namely the huge terms-of-trade shock due to rising energy prices following the Russian invasion of Ukraine and monetary tightening. However, in the longer term, we are optimistic that the UK economy can benefit from a looser regulatory environment and a more market-friendly tax regime, if this entails fiscal discipline.

* Economist at Berenberg Bank.