Monthly economic brief: December 2022

Economic outlook

The economy is forecast to contract in 2023 as inflation gradually falls over the year.

• The economic outlook is extremely challenging with output growth starting to contract in the second half of 2022, inflationary pressures remaining elevated, tightening monetary conditions and the downside risks from ongoing uncertainty in global energy supply chains.
• At a global level, in November, the OECD forecast global economic growth to slow to 2.2% in 2023, with US and Euro Area growth slowing to 0.5% over the year and output projected to decline in several European countries over this winter period.^[20]
• Inflation in OECD countries is projected to be 9.4% in 2022 and is expected to fall back but remain elevated in 2023 at 6.6%, with rising interest rates, weaker demand and the easing of supply chain bottlenecks projected to moderate inflation further into 2024 to 5.1%.
• At UK level, the Bank of England and the Office for Budget Responsibility forecast that the fall in output in the third quarter of this year has marked the start of a UK recession, with high rates of inflation and tightening financial conditions expected to cause a significant fall in real household disposable incomes and demand over 2023-24.^[21]
• There is significant uncertainty over the depth and duration of the expected recession, the pace at which inflation will fall back towards the 2% target, and the pace at which output will return to pre-recession peaks. This will reflect domestic and global economic developments, the impacts of fiscal and monetary policy and the persistence of the current energy supply and price shock.
• The Bank of England forecast (central) the UK economy to remain in recession from Q3 2022 through to the first half of 2024 with UK GDP forecast to fall 1.5% in 2023 and 1% in 2024. More recently, and taking account of the UK Government Autumn Statement, the Office for Budget Responsibility forecast the UK recession to last just over a year from Q3 2022 with UK GDP forecast to fall 1.4% in 2023 and grow 1.3% in 2024. Both forecasts expect inflation to fall back over 2023 and 2024 and a notably shallower recession than those in 1980, 1990 and 2008.
• The average of new independent forecasts in November (published monthly by HMT) highlights the downgrades during 2022 to UK 2023 growth forecasts as economic conditions deteriorated.^[22] Latest forecasts from November project, on average, that UK GDP will fall 0.9% in 2023, further weakening from the forecasts in October and in stark contrast to the average expectation of 2% growth from forecasts released at the start of the year in February.

• Forecasts for Scotland's economy have followed a similar pattern. Most recently in October, the Fraser of Allander Institute forecast Scottish GDP growth in 2022 of 3.6%, however set out that the economy is likely to contract in the second half of the year before contracting by -0.6% in 2023 before returning to growth of 0.8% in 2024.^[23]
• The Scottish Fiscal Commission (SFC) will provide updated economy forecasts for Scotland on 15 December alongside the Scottish Budget.^[24]