Key economic predictions for 2023

2022 was a tale of woe for many, but what does 2023 hold for the economy? Richard Ramsey, Chief Economist, Northern Ireland, Ulster Bank, shares his view.

Interest rates and inflation: hitting the highs

With inflation running above 10% in the second half of 2022, the Bank of England (BoE) has understandably increased interest rates to try to bring prices down. However, raising interest rates when we’re at an uncertain time economically might also raise some eyebrows. High inflation is usually a sign of an overheating economy but that’s not where we are currently. Gross domestic product (GDP) growth is hovering around 0% and higher interest rates may dampen growth further. 

Even if you strip out the cost of food and energy, inflation is still well above the BoE’s 2% target, at around 6%. Whether we like higher rates or not, we have to get to grips with inflation, and some may argue that the BoE has been too slow to respond, and that the current Bank Rate of around 3% isn’t aggressive enough. After all, interest rates were far higher in the run-up to the financial crisis than they have been since. Predictions for inflation in the second half of 2023 are far lower than our current level, so the country is in limbo, waiting to see what will turn up. 

Thinking longer-term, getting out of the low-interest-rate environment we’ve had in the past might be no bad thing: there is a school of economic thought that says companies should be allowed to fail as it redistributes resources and human capital to other parts of the economy. It may be time to end the malaise.



Employment and the cost of living: some good news

One positive from 2022 that looks set to continue in 2023 is the labour market. Normally, what we think during a recession is that there will be significant job losses, redundancies and rising unemployment as a result of reduced demand. Currently, unemployment is at 3.7%, which is historically low. However, as we know, the pain for workers has been less about the risk to jobs and more focused on the cost of living. Disrupted supply chains, the economic hangover caused by the pandemic, and uncertainty over the situation in Russia have caused prices in some markets to soar as supply of energy and key imports falter.

Heading into 2023, many will feel that there needs to be a pain-free way of ending the cost of living crisis. Unfortunately, pain-free seems not to exist. The BoE needs to contain inflation, and that means interest rates rising to around 4% before long. A resolution to the Russia-Ukraine conflict would be an added boon to falls in inflation during 2023.

The important thing to remember is that the vast majority of people will not lose jobs, the majority of businesses won’t fail and eventually, we’ll recover

Richard Ramsey
Chief Economist, Northern Ireland, Ulster Bank

Taxes and government: in step again

Former chancellor Kwasi Kwarteng’s mini-budget in September 2022 failed to get a nod of approval from international financial markets, as investors in the UK grew uncertain of the nation’s economic prospects in light of the proposed tax cuts. Since then, markets seemed to have accepted the stance of Kwarteng’s replacement, Jeremy Hunt, and the value of sterling has somewhat stabilised.

While the UK is now heading for higher taxes to fund government spending, and to try to reduce government indebtedness, it feels like the Treasury and the BoE are working in unison again. However, the unease around raising interest rates while we risk a recession applies to taxation too.

GDP and trade: optimism needed

We started 2022 with a sense of optimism for output in the wake of lockdowns in response to the Covid pandemic. But much of that dissipated with the invasion of Ukraine by Russia – and again supply chains have been affected. In late 2021 the movement of goods was beginning to normalise, but high gas prices caused by the war in Ukraine, as well as the threat to food prices, are having a knock-on effect around the world, but especially in Europe. 

Take Germany as an example: as an exporting powerhouse, producing everything from chemicals to cars, its industry was predicated on the supply of cheap energy. But less cheap energy means that business model is under threat. Gas prices have been falling of late, but that is mostly down to near-full storage capacity in countries that import it. Once those stocks are depleted in the coming months, the question is how they will be replenished if gas supplies from Russia remain absent.

The important thing to remember is that the vast majority of people will not lose jobs, the majority of businesses won’t fail and eventually, we’ll recover.

Labour and supply: some southern comfort for NI

After the global financial crisis, Northern Ireland’s exposure to the Republic of Ireland’s economy was a significant risk, with the International Monetary Fund (IMF) visiting Dublin and the Irish economy experiencing one of Europe’s worst crises. But how situations change. Currently ROI’s economy tops the continent’s economic growth forecasts and – a rarity among many economies – its public finances have a surplus. Quarter-on-quarter growth has hit 1.8% in 2022. For NI, ROI’s success provides some southern comfort.

The Northern Ireland Protocol has been a significant boost to the region, but clarity on the Protocol would be helpful to industry. Currently, the grace periods in place are preventing some of the Protocol’s pain from being felt, but how far can these be extended? If the negotiations can move forward, we may see maximised opportunities between NI and the EU, with minimised disruption between local businesses and the rest of the UK.

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