By Xavier Fontdegloria

The U.K. economy is expected to shrink in 2023, and the country is bound for a decade of sluggish growth unless action is taken to boost productivity, the Confederation of British Industry said Monday in its latest forecast.

The economy is set to contract by 0.4% next year, down from a previously estimated 1% expansion, falling into a "relatively mild" recession, which likely already started in 2022's third quarter and will last until the end of 2023, it said. The U.K. economy contracted 0.2% in the three months through September.

The country's gross domestic product would only return to its prepandemic level in mid-2024, CBI said, in stark contrast with most advanced economies.

Like much of Europe, the U.K. economy has been hit by a sharp rise in energy prices after Russia's invasion of Ukraine, unveiling a cost-of-living crisis that is squeezing consumers' incomes and companies' margins.

Inflation is expected to fall in 2023, but will remain at an average of 6.7%, still above the Bank of England's 2% target, according to the CBI.

"Another recession in the space of two years is tough going," CBI Lead Economist Alpesh Paleja said. "A second year of high--albeit falling--inflation will hit households hard, especially those lower down the income distribution."

The U.K. economy is also weighed by an incomplete labor market recovery after the Covid-19 pandemic, and the longer-term impact of the country's departure from the European Union, which has seen business investment stagnate.

These factors are hitting productivity and darken the long-term outlook for the U.K. economy, the CBI said.

"Britain is in stagflation--with rocketing inflation, negative growth, falling productivity and business investment," CBI Director-General Tony Danker said. "We will see a lost decade of growth if action isn't taken."

The CBI forecasts business investment at the end of 2024 will be 9% below its prepandemic level, while household spending will be 2% lower.

The organization called for government action to address skill and worker shortages, and unlock business investment through capital allowances and regulatory changes.

"The Prime Minister and Chancellor must use levers of growth to ensure this downturn is as short and shallow as possible, but also to address the persistent weakness in investment and productivity," Mr. Danker said. "We cannot afford to have another decade where both are stagnant."

Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com

(END) Dow Jones Newswires

December 05, 2022 05:00 ET (10:00 GMT)