BRITAIN'S economy is expected to shrink by around 0.2 per cent each quarter from October through until June next year, economists have warned.

The prolonged economic decline will result in a 0.3 per cent fall in gross domestic product (GDP) for 2023 as a whole, the EY Item Club predicted in its autumn forecast.

The economic forecasting group has significantly downgraded its previous summer forecast which estimated the economy would grow by one per cent in 2023.

UK economy facing recession

The likelihood that the UK economy will face a recession until the middle of next year is due to a combination of factors. High energy prices, surging inflation, rising interest rates and global economic weakness.

An economy enters a technical recession when its GDP falls for two or more consecutive quarters.

However, the risk of a severe downturn has been reduced by the Government’s energy bills cap, EY Item Club said, meaning that it will not be as bad as previous recessions.

Also, when high inflation eases, the weaker pound boosts exports and the Bank of England’s interest rate hikes end, GDP should return to growth in the second half of 2023, EY said.

The economy is then expected to expand 2.4 per cent in 2024 and 2.3 per cent in 2025.

But the group warned that there is a risk that growth could be dragged down by further economic shocks.

Hywel Ball, EY’s UK chair, said: “There’s no doubt the UK economy faces a difficult period ahead, with global headwinds adding to domestic pressures.

“The silver lining is that the Government’s intervention on energy bills is expected to limit the extent of the downturn, while ONS data suggests that households have access to a larger cushion of pandemic savings than previously thought.

“Nevertheless, there are very significant risks to the forecast, with the potential for further surprises or global instability creating additional drags on growth.

“Businesses will need to think very carefully about their resilience and plan for different scenarios, while also being mindful of the support they provide to their customers and employees.”

South Wales Argus: Chancellor Jeremy Hunt (PA)Chancellor Jeremy Hunt (PA) (Image: PA)

The energy support package is also expected to tame inflation which could peak at just below 11 per cent in October, lower than the 15 per cent that it could have hit without an intervention.

However, annual inflation is still expected to outstrip wage growth until 2024, meaning that people will see their disposable incomes squeezed.

The decline in spending power over the next year will be the biggest drop since the 1970s, EY warned.

But by 2024, inflation will fall back to below the Bank of England’s two per cent target, dropping to 1.8 per cent, according to the forecast.

What is a recession?

A recession is a period of temporary economic decline. During this period, trade and industrial activity are reduced. This is generally identified by a fall in GDP in two successive quarters.

A recession is a sign that the economy is doing badly.