UK economy to shrink in 2023, risks "lost decade" - CBI

Britain's economy is on course to shrink 0.4 per cent next year as inflation remains high and companies put investment on hold, with gloomy implications for longer-term growth, the Confederation of Business Industry forecast on December 5.

"Britain is in stagflation - with rocketing inflation, negative growth, falling productivity and business investment. Firms see potential growth opportunities but ... headwinds are causing them to pause investing in 2023," CBI Director-General Tony Danker said, Reuters reports.

The CBI's forecast marks a sharp downgrade from its last forecast in June, when it predicted growth of 1.0 per cent for 2023, and it does not expect gross domestic product (GDP) to return to its pre-COVID level until mid-2024.

Britain has been hit hard by a surge in natural gas prices following Russia's invasion of Ukraine, as well as an incomplete labour market recovery after the COVID-19 pandemic and persistently weak investment and productivity.

Unemployment would rise to peak at 5.0 per cent in late 2023 and early 2024, up from 3.6 per cent currently, the CBI said.

British inflation hit a 41-year high of 11.1 per cent in October, sharply squeezing consumer demand, and the CBI predicts it will be slow to fall, averaging 6.7 per cent next year and 2.9 per cent in 2024.

The CBI's GDP forecast is less gloomy than that of the British government's Office for Budget Responsibility - which last month forecast a 1.4 per cent decline for 2023.

But the CBI forecast is in line with the Organisation for Economic Co-operation and Development (OECD), which expects Britain to be Europe's weakest performing economy bar Russia next year.

The CBI forecast business investment at the end of 2024 will be 9 per cent below its pre-pandemic level, and output per worker 2 per cent lower.

To avoid this, the CBI called on the government to make Britain's post-Brexit work visa system more flexible, end what it sees as an effective ban on constructing onshore wind turbines, and give greater tax incentives for investment.

"We will see a lost decade of growth if action isn't taken. GDP is a simple multiplier of two factors: people and their productivity. But we don't have people we need, nor the productivity," Danker said.