The BoE is currently projecting a sharp slowdown in growth. The BoE anticipates that GDP will decline by 0.25% in 2023, followed by 0.25% growth in 2024. It is important to note these projections are unusually uncertain. A wide range of factors will influence the economic outcome, including the degree of monetary tightening that will be adopted to rein in inflation. The BoE projections are based on the path of Bank Rate implied in forward markets which, as at the time of the BoE’s forecasting exercise believed it will rise to 2.5% at the end of 2023. If Bank Rate were to rise more than this, the growth projection would be further downgraded.
Furthermore, it is extremely difficult to predict how the zero-Covid policy adopted in China will impact the global economy, but the longer it stays in place the higher the risks are to growth. The same is true of the war in Ukraine due to the high degree of uncertainty regarding its duration and outcome, and of the resulting commodity price volatility adding to the headwinds to global growth.
From Q1 2023 onwards, the BoE projects year-on-year growth to moderate to between -0.8% and 0.5%. Given the high levels of uncertainty surrounding the outlook, the risks are large and appear to be skewed to the downside. While the BoE makes no mention of a recession in its May monetary policy report, the UK economy faces significant risks over the next 12-18 months and the BoE itself projects that UK GDP will be moderately lower in 2023 than this year.