Inflation to peak at 17% in H1 2023, PwC predicts

Headline inflation could peak at a five-decade high of 17% in the first half of 2023, and the UK is likely to enter a recession as early as this year, followed by a period of negligible or negative growth through 2023 and 2024, according to the latest PwC Economic Outlook.

Although the UK economy will continue to grow at a rate of between 3.1% and 3.6% in 2022, the Outlook projects that peak inflation could range from 13% to 22% in 2023, with average annual energy bills ranging from £3,400 and £6,900, depending on the outlook for energy prices and the size and form of anticipated government intervention.

The UK will likely report growth of between 3.6% in a “mild winter” scenario and 3.1% in a “harsh winter” scenario by the end of 2022, followed by two years of slow, or even negative, real GDP growth.

Year-on-year changes in economic output will reportedly range between -1.3% to 0.2% in 2023, and between -0.3% to 0.6% in 2024 under the harsh winter and mild winter scenarios respectively.

However, the firm said that if all regions improved productivity in their respective industries to at least the national industrial median, this could potentially add as much as £71.6bn to the total UK output per year, estimated to be around 3.4% of total GDP in 2023.

Nick Forrest, UK Economics Consulting leader at PwC, said: “Businesses and consumers could face two ominous milestones in the months ahead: a potential five-decade high in the inflation rate, and the largest fall in real wages since records began. We are already seeing a deteriorating outlook for consumer sentiment and business expenditure.

“Inflation forecasts have changed rapidly in recent weeks, driven predominantly by the market price of natural gas. Until gas markets regain stability the outlook for inflation will continue to be hard to predict. This will be a challenging environment for businesses to plan, mitigate and adapt.”

Hoa Duong, PwC senior economist, added: “The UK has consistently lagged behind other advanced economies when it comes to productivity, and currently sits fourth among the G7. Yet what these findings highlight is the extent to which this is a regional and sectoral issue which drives a national problem.

“This regional polarisation is driven by imbalances between skills, workforce demographics and regional income. While the policy solutions will be specific to each region, there is a potentially substantial gain to UK GDP from closing this productivity gap, alongside the macro-level conversation about how to boost economic growth at the national level.”