UK economy shrinkage not as steep as initially feared​

By Jake Rickman​

What do you need to know this week?

The UK’s economy is proving more resilient than analysts initially forecasted.

As the FT reports, the UK economy is expected to shrink by an average forecast of 0.6% rather than the 1% contraction economists forecasted in December 2022 and January 2023.

Analysts point to normalising energy prices and moderating rates of inflation combined with more resilient consumer demand as the primary reasons for the improved forecast. Further evidence of a stronger economy includes the fact that the Treasury will in fact bring in an unexpected £30bn surplus from its revenue collection.

Why is this important for your interviews?

For your interviews and applications, if you have been tracking the macroeconomic trends over the past few months, it is important to recognise that the economic headwinds may be shifting from “gale force” to merely gusty.

In real terms, the current forecasts still amount to a technical contraction for two or more consecutive quarters and therefore still means Britain is in a recession. However, it would be hard to out-do the bleakness that was last month’s economic forecasts, which by some measures had the UK’s economy fairing worse than Russia’s.

Accordingly, the economic prospects for businesses and financial service firms investing in the UK’s economy, which, while not necessarily sunny, are admittedly less cloudy. It also speaks to a wider improvement in the forecasts of other economies like the Eurozone and the US, which also stand to benefit from the lower cost of energy and evidence that the inflation may be waning.

That said, as quickly as overcast skies can turn torrential, factors such as the ongoing war in Ukraine, now in its second year, geopolitical tensions with China, and further central bank interest rate hikes may converge and redouble gloomier forecasts. As such, it is always important to appreciate the fluidity of economic forecasts.

How is this topic relevant to law firms?

Sustained evidence that the previously forecasted downturn may have been overstated is likely to translate into revised predictions about this year’s financial performance for City legal and financial advisors. Indeed, as The Lawyer reports, Herbert Smith Freehills and Norton Rose Fulbright have both publicised high-profile instructions advising clients in the equity capital markets, including HSF’s role advising the underwriters to publicly traded private equity firm 3i’s share placement. This is despite the prevailing headwinds and generally morose ECM activity.

That said, as with the uncertainty that comes with economic forecasts in general, the City is not out of the woods yet. Firms across the board are still unlikely to generate the record fees earned in FYs 2020-21 and 2021-2022. As such, certain law firms may still downsize practice areas heavily exposed to the business cycle such as M&A and leveraged finance teams.