Fresh optimism over UK growth prospects

Growing optimism among business leaders over the prospects for the UK economy this year was illustrated by two separate reports on Monday.

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David Sapsted

18 April 2023

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One from the EY Item Club, reversed its previous forecast of a significant, 0.7 per cent contraction of GDP in 2023, with the think-tank now predicting 0.2 per cent growth. EY is also now forecasting economic growth of 1.9 per cent growth next year and 2.3 per cent in 2025.Meanwhile, the latest survey by Deloitte of chief finance officers (CFOs) at Britain's biggest companies found confidence levels had risen at their sharpest levels since 2020.

Optimism rises among CFOs

Deloitte found 25 per cent more finance chiefs were optimistic about the future than those who were pessimistic. This compares with a net balance of 17 per cent who were downbeat only three months ago."Since the beginning of the year, energy prices have fallen, inflation looks to have peaked, relations with the EU have improved since the 'Windsor Framework' and there has been a period of comparative political calm after the turmoil of last year," said Ian Stewart, chief economist at Deloitte.“The economic unpredictability that marked the beginning of 2023 has started to clear, with CFOs reporting the largest decline in perceptions of uncertainty to date. Business confidence has rebounded, helped by a decrease in energy prices, an easing of Brexit concerns and an improving inflation backdrop.“Crucially, finance leaders report little change in credit conditions, suggesting that March’s events in the global banking system have not affected the pricing and availability of credit for UK corporates. Despite a brighter outlook, CFOs are alive to the continued risks facing the economy. Corporates remain in defensive mode and CFO risk appetite is subdued.”

Significant growth in capital AI investment imminent

One notable exception to the subdued investment appetite was in the artificial intelligence arena with Deloitte recording that an overwhelming majority of CFOs expected to see significant growth in AI spending over the coming years.The forecast from the EY Item Club suggested that while the economy was likely to flatline in the first half of the year - mainly because of inflation, interest rates and extra bank holidays in May because of the King's coronation - the outlook would improve from the summer onwards.Hywel Ball, EY's UK chair, said: “Economic performance has been resilient, despite challenges in the latter half of 2022, but the significance of the upgraded outlook shouldn’t be overblown."

Sentiment a 'chance to shed some of the gloom'

He said that “while easing, the economy’s challenges haven’t gone away overnight: inflation is still in double-digits and energy prices remain historically high.“However, perceptions matter and the fact the economy has been able to outperform expectations could help stir a revival in business and consumer confidence. Of course, there is still room for economic surprises, but the balance of risks has become a little more favourable than the last forecast.“And while subdued growth this year is far from ideal, falling energy prices and inflation, an end to rises in borrowing costs, and growing confidence, mean the economy has a chance to shed some of the gloom it has accumulated recently.”