The UK will narrowly avoid a formal recession this year. That’s the consensus that is emerging based on the current data. This morning’s Economic Outlook from the OECD – which forecasts 0.3 per cent growth in 2023 – reflects similar projections from the IMF’s latest update and the Office for Budget Responsibility, which have revised their figures upwards in recent months. But to what extent will this modest growth actually be felt by Brits? Here the picture is far less positive.
Inflation – which remains stubbornly high, in Britain especially – continues to eat away at real wages. The OECD predicts that the UK will continue to suffer from some of the highest inflation rates among advanced economies, averaging 6.9 per cent this year (once again bringing into question the Prime Minister’s pledge to ‘halve inflation’ by the end of the year). The inflation rate on the year to April sat at 8.7 per cent, finally falling out of the double digits – but this remains notably higher than countries like the United States, where inflation is now below 5 per cent.
This spells bad news for the Treasury
Core inflation remains a big problem, as seen in the last Consumer Prices Index (CPI) update, where the rate actually rose to its highest level since 1992. Core inflation is expected to hover above 5 per cent in 2023 and 3.2 per cent in 2024, according to the OECD, making it very difficult to get back to the Bank of England’s target of 2 per cent.
The report notes this rate (which excludes food and energy) is ‘more persistent’ in the UK ‘due to strong services inflation.’ A main factor here remains the UK’s extremely tight labour market, which currently has on offer over one million vacancies. The government’s most recent announcements around childcare and welfare reforms are cited in the report as possible pathways for relieving these pressures. But nothing in the OBR’s assessment of the March Budget suggests that the current set of reforms is going to tackle this labour shortage anytime soon.
Meanwhile, political battles over headline net immigration figures suggest that the government will hesitate to get foreign workers to take up jobs that Brits are rejecting. All this suggests a continuously slow loosening of the labour market, which will keep inflation higher for longer.
This spells bad news for the Treasury, which is under pressure to start delivering some election-focused announcements, including tax cuts. As we saw only a few weeks ago, the UK remains extremely sensitive to even the smallest changes in interest rates: as market expectation for another rate increase heightened, gilt yields shot up once again, not far off where they ended up after Liz Truss’s mini-Budget announcements. The extent to which the UK is ‘exposed to movements in bond yields’ further ties its hands, as borrowing costs continue to rise and the Treasury has to account for paying the bill on money we’ve already spent. The OECD notes this means the government’s ‘fiscal stance will be restrictive over 2023-24, as the government complies with its national fiscal rule of decreasing public debt within a five-year horizon,’ as those borrowing costs stack up.
All this is a reminder that the colossal spending that took place during the pandemic, and the economic effects of suppressing demand during lockdowns, were never going to be consequence free. Even if the UK does avoid recession, there is still quite a lot of economic pain to come.
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