The tougher economic headwinds ahead are highlighted in a new report from Big Four accountant KPMG which warns there is now a “significant risk” of recession, albeit a relatively mild one.

Its UK economic outlook predicts that growth will more than halve this year to 3.2% from 7.4% in 2021, before tumbling to 0.7% in 2023 as the cost-of-living crisis and the war in Ukraine continues to take its toll.

The Ukraine situation plus the effects of lockdowns in China have hit commodity prices and restricting supply, lessening global growth, while the knock-on effects on prices are leading to a sharp drop in household spending.

As a result, KPMG chief economist warned that “weakening domestic momentum” could put the UK at “significant risk of a mild recession”.

She said: “We expect growing external headwinds and weakening domestic momentum to see economic growth slow significantly over the next year, with a significant risk of a mild recession.”

In its “downside scenario”, the firm warns that the UK could see a recession – defined as gross domestic product or economic output falling in two or more successive quarters – with output dropping by 1.5% in the year between 2022 quarter three and 2023 quarter three.

If this more pessimistic view comes to pass, UK output would fall by 1.1% in 2023, following 3% growth in 2022.

Negative factors likely to weigh on the economy here include a possible recession in the US caused by aggressive rate rises by the Federal Reserve in addition to a possible eurozone recession due to problems with gas supplies amid continuing problems with Russia. One or both of these would add to the existing the issue of falling consumer spending as cash-strapped households reign in their finances.

Importantly though, it is KPMG’s view that the predicted UK recession would be far less severe than seen in previous downturns.

The recession after the financial crash in 2008 saw a near 6% slump in GDP in the five quarters following the first one in 2008.

Household incomes have already come under significant pressure due to the cost-of-living crisis, with inflation now running at 9.1%.

Household incomes are expected to fall by 0.8% in real terms this year and 0.5% the following year, according to KPMG.

The resulting impacts will see consumer spending drop from 6.2% in 2021 to 3.9% in 2022 and 2023, according to KMP’s research.

Ms Selfin said that in its recession scenario, manufacturing and financial services could face the biggest hit over coming years, with manufacturing potentially falling by 2.8% in 2024 and output in the financial services tumbling by 2.5% in 2024.

KPMG is forecasting two more rates rises in the UK as the Bank of England battles to rein in inflation.

The Bank has already raised interest rates to 1.25% to try and curb increasing prices.

However, rates could reach 1.75% by the end of the year, KPMG said.

Ms Selfin added: “The Monetary Policy Committee will have to weigh the risk of high inflation spilling into pay growth against the risk of a recession.

“Facing such a trade-off, we think it is likely that the doves on the Committee could swing the balance towards a more gradual uplift than is currently priced in by the markets.”

These increasing headwinds will step up the pressure on the government to take action to introduce measures that could help stimulate consumer sending possibly in the form of a cut in VAT.

This would have the effect of easing household financial pressures and, as a result, the increased spending would benefit businesses, many of whom have only begun to recover after the impacts of the pandemic.

Such action could mean that the recession will be milder and more short-lived.