UK shows signs of resilience in face of interest rate woe
The British economy is showing ‘signs of resilience’ despite high interest rates, experts claim.
Even though interest rates are at their highest level for 15 years, there are signs that the economy will hold up, according to the EY Item Club’s autumn forecast.
Hywel Ball, the UK chairman of accountancy firm EY, said: ‘The cost of debt is set to be the biggest headwind for the economy over the next 12 months, with consequences for businesses and consumers.’
But he added: ‘While high interest rates will weigh heavily on growth, there are still signs of resilience from which we can take positives.
‘Inflation is heading in the right direction, average wages are rising in real terms once more and household and corporate balance sheets remain unusually healthy.’ The EY Item Club economic forecasting group says sluggish growth will persist into 2024 thanks to the burden of high rates and the weaker-than-anticipated labour market.
‘Signs of resilience’: There are signs that the economy will hold up, according to the EY Item Club’s autumn forecast
It predicts that the economy will grow by 0.6 per cent this year – better than the 0.4 per cent it forecast in a report in July.
However, GDP in 2024 is expected to be slightly lower than hoped, with Item Club economists moving their prediction from 0.8 per cent to 0.7 per cent.
The Bank of England has raised its base rate 14 times in a row, but held it last month after price rises slowed faster than expected.
The Bank has aimed to tame inflation by raising interest rates, causing anxiety for millions of mortgage holders.
After the base rate was held at 5.25 per cent last month, Chancellor Jeremy Hunt said the UK was ‘starting to see the tide turn against high inflation’.
The pace of price rises fell to 6.7 per cent in the year to August, a drop from 6.8 per cent in the year to July. Cooling food inflation on popular products including milk, cheese and eggs contributed to the surprise drop.
The Item Club predicted headline inflation would fall to around 4.5 per cent by the end of 2023, before hitting the Bank of England’s 2 per cent target in the second half of 2024.
Falling inflation, a likely end to rate rises and a return to real pay growth would prevent the economy from sliding into a recession, it forecast.
Britain’s economy returned to growth in August, rising 0.2 per cent after falling sharply in July. This added to expectations that interest rates would be left unchanged again at the next review on November 2.
