Despite positive developments, the UK is still unlikely to avoid a recession through 2023
While new fiscal support measures should prevent a further acceleration in inflation through 2023, the economy is still set to experience a period of mild contraction. MNCs should adjust their medium-term strategic expectations and revisit their portfolio offering in light of the expected easing in domestic consumption across all key customer segments. Additionally, depreciation pressures on the GBP will persist despite tighter monetary policy, which will put additional pressure on firms’ bottom lines.
Overview
- New UK PM Liz Truss has moved forward with plans to freeze energy prices, with the new cap set at an annual GBP 2,500 per household.
- The new UK cabinet is also expected to reverse the previously implemented 1.25% national insurance hike.
- While Truss has previously threatened to trigger Article 16 of the Brexit agreement, essentially suspending the Northern Ireland Protocol, such a move remains unlikely amid early signs of a compromise.
Our View
New PM Truss has quickly moved to appoint a new cabinet, effectively purging previous internal party opposition and introducing a significant loosening of fiscal policy measures, which include revisions of earlier tightening and an indefinite postponement of the corporate tax hike, which was supposed to be in place at the beginning of 2023. Most importantly, however, the government has introduced an energy price cap that will be in place at least until the end of 2023. The announced cap is significantly lower than energy regulator Ofgem’s projections, according to which the price cap was likely to go up to more than GBP 5,000 by mid-2023. The move, however, was anticipated and does not change our inflation expectations significantly; thus the headline rate will remain historically elevated, as high import costs and rising utility prices (with the new price cap still being nearly twice as higher as the rates seen at the beginning of 2022) will continue to push prices up throughout H1 2023. Furthermore, the new measures will likely require an additional GBP 100–150 billion in borrowing, which will complicate budget balancing and lead to another rise in both deficit and public debt, which will weigh on the GBP’s performance, leading to a slight depreciation in 2023 and 2024, when compared to 2022.
When it comes to the EU, despite earlier threats that the government will trigger Article 16, new proposals by the EU, which involve a substantial reduction on checks on goods moving between the UK and Northern Ireland, signal that a compromise on the controversial Northern Ireland protocol remains likely. While this is in line with our expectations, which envisioned a technical solution that involved reduced regulatory burdens, risks are still in place, and ongoing Brexit disruptions will still feed into the elevated import costs of goods coming from the UK. Additionally, while the delay in full customs checks implemented in Q2 2022 has softened some of the mounting operational challenges, further tightening in 2023 will considerably complicate strategic planning. As such, despite positive developments in terms of both fiscal support for the economy and the lingering issue of the UK’s relationship with the EU, the former is unlikely to avoid a recession through 2023.
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