UK economy set to slow, warns KPMG

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Peninsula Team, Peninsula Team

(Last updated )

Against the backdrop of weakening global economic conditions, the UK economy could be heading for a marked slowdown in growth in the second half of the year, according to KPMG

The UK economy could experience ‘renewed signs of stress’ for the remainder of the year as it tackles high interest rates, uncertainty and overall low productivity.

The Big Four firm said its forecasts show real GDP growth slowing from 4.1% in 2022 to just 0.4% in 2023 and eventually 0.3% in 2024.

Additionally, inflation remains high and may only return to its 2% target by the latter part of 2024, the report warned.

With hiring also losing momentum and workers feeling less confident about switching positions, there is still a huge amount of uncertainty hanging over the UK’s future.

Monetary policy will also remain restrictive for some time. The Bank of England voted to hold interest rates unchanged at 5.25% last week, following a dip in inflation for August, which fell from 6.8% to 6.7%.

The report said: ‘Some Bank of England officials expressed a preference for keeping interest rates around the current level in the medium term, rather than raising them even higher before subsequently cutting them next year.

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‘Nonetheless, given the already fragile state of the economy and the full impact of past tightening yet to feed through to activity, we would expect the Bank to start contemplating cuts potentially from November 2024 onwards, especially if the US fed loosens policy next year.’

The slowdown in activity is also being reflected in the labour market, the report warned. The unemployment rate was 4.3% in July, 0.7% higher than a year earlier. Annual employment growth has also slowed from around 1% at the start of 2023 to 0.5% in recent months.

On top of this, the demand for staff is now losing momentum. The number of vacancies has dropped by 313,000 (24%) since the peak in the middle of last year, according to the latest KPMG/REC report.

As activity slows in the coming months, it could see the unemployment rate increase from an average of 4.2% in 2023 to 4.8% in 2024.

Survey evidence from the Bank of England pointed to challenges in recruiting skilled staff in the IT, engineering and finance sectors.

The report added: ‘While the period immediately post-Covid has been characterised by an employee market, facilitated by ample job opportunities, the latest trends point to uncertainty about the future, limiting their bargaining power.

‘Although the rate of job-to-job flows has dropped below 3%, it nonetheless remains above the pre-pandemic average of 2.5%, which continues to put upward pressure on wages.’

However, the firm did find that the acceleration of digitalisation could see a rise in productivity, as new technologies and working practices are introduced.

For example, the rise in home working could have the potential to boost productivity by fostering greater flexibility in the labour market, but the evidence, according to the firm, is so far mixed.

In addition, the recent increase in input costs could encourage businesses to increase their production efficiency to rebuild margins.

For information on working from home, visit BrAInbox today where you can find answers to questions like Can I pay someone less if they are working from home?

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