As at 27 March 2023
During the March Monetary Policy Committee (MPC) meeting, the Bank of England (BoE) predicted that the UK would avoid a recession in 2023. Previously, the BoE had forecast a technical recession in 2023 (defined as at least two consecutive quarters of declining GDP), due to the impact of higher interest rates and energy prices. The recession forecast had an important bearing on the BoE’s policy guidance, as it fed into their projection that Consumer Price Index (CPI) inflation would fall below 2% (YoY) in 2024.
UK Recession and Expansion Probabilities
Source: Fulcrum Asset Management LLP, Haver Analytics
Fulcrum’s activity nowcasts use Bayesian Dynamic Factor (DFM) modelling to give a real-time reading of GDP growth. These nowcasts can in turn be used to project real-time recession and strong expansion probabilities for the next 12 months. Strong expansions are defined as four quarters of GDP growth above its 20-year average. Our model shows that risk of recession has declined markedly, from around 50% in February to 25% by the end of March (see the thick red line). The changes were driven by data showing a rebound in business sentiment, rising consumer spending and a strengthening labour market.
Although short-term interest rates declined globally in March amid instability in the banking sector, UK rates saw a significantly smaller decline than in other advanced economies. Much of this can be attributed to the positive re-assessment of the UK growth outlook. Using DFMs, investors can access a timely picture of how economic conditions are evolving from one week to the next and update their interest rate views accordingly.