The Bank of England now expects a shallower and shorter recession this year than it predicted in November - although GDP will still not return to peak levels until 2026.
The Bank’s Monetary Policy Committee (MPC) - which on Thursday raised interest rates to 4 per cent - predicted the UK economy will shrink by just 0.5 per cent over 2023, after previously projecting a 1.5 per cent decline.
Although the UK is still on course to meet the technical definition of a recession - two consecutive quarters of falling output - it will be one of the mildest recessions on record.
The Bank said stronger than expected labour markets and a sharp fall in energy prices have prompted the more upbeat forecasts.
It is slightly more optimistic than the IMF, which this week forecast the UK economy would decline by 0.6 per cent.
The MPC’s 2024 forecast has also been upgraded. It now expects the UK economy to contract by 0.25 per cent next year compared to 0.5 per cent in its November forecast.
The Bank’s economists now also sees the UK exiting recession slightly sooner than they thought in November.
Having previously said growth would not return until the third quarter of 2024, the economy is now projected to start growing again in the second quarter.
Over a total of five quarter of decline GDP is expected to fall 1 per cent peak to trough. In November the Bank said the fall would be 3 per cent over eight quarters.
Recession was avoided in the fourth quarter of last year when the Bank believes the economy grew by 0.1 per cent.
However, the forecast recovery will be slow, with GDP only returning to levels reached before the pandemic by 2026.
The unemployment rate is still expected to rise as the UK enters recession, but is now set to reach 5.0 per cent by 2025, rather than 6.0 per cent.
Jonathan Moyes, head of investment research at financial advisers Wealth Club, said: “This was a much more optimistic tone from the Bank. Interest rate rises are expected to peak by mid-2023 at 4.5 per cent before easing back, CPI inflation is expected to fall to just 1.0 per cent in 2025, and GDP growth has been upgraded significantly from its November forecast.”
