The UK will avoid a recession this year, but growth will be subdued, a leading economic forecaster has said.
Government cost of living payments and energy bill subsidies supported households more than expected at the end of last year, the EY Item Club said.
The forecasting group expects the gross domestic product (GDP) measure of output to rise by 0.2% - a significant upgrade from the 0.7% decline expected in its January forecast.
The economy is expected to flatline in the first half of the year and narrowly avoid meeting the recession criteria of two consecutive quarters of negative growth. In the second half of the year a return to growth is expected as inflation and household bills fall sharply.
Inflation will begin to decline quickly because prices this year are compared with already high prices last year, and household bills are set to drop from July once households benefit from the sharp decline in natural gas prices over winter, the EY Item Club said.
The group expects inflation to fall close to the Bank of England’s 2% target, ending the year just below 3%. The forecast is about a percentage point lower than the group predicted in January, with forecasters expecting inflation to hit the central bank’s target by the second half of next year.
Inflation hit 10.4% in February, but it is expected to fall to single digits when the Office for National Statistics publishes the figures for last month on Wednesday.
Martin Beck, chief economic adviser to the EY Item Club, said prices would “hopefully grow by less than income by the end of the year”.
Pay growth is likely to slow to 4.2% this year, from 6.4% last year, the club said. The number of people moving jobs — which typically leads to higher pay — has fallen from the highs recorded over the pandemic.
Hywel Ball, the EY’s UK chairman, said the economy seemed to be “turning a corner, albeit very slowly”. He added: “While easing, the economy’s challenges haven’t gone away overnight. Inflation is still in double digits.”
