UK Economy Set to Shrink but Avoid ‘Technical Recession’: Official Forecaster
The UK economy is expected to shrink this year but avoid a “technical recession,” the government’s economic forecaster has said in its latest assessment.
The Office for Budget Responsibility (OBR) said that a technical recession—two quarters of negative growth—will be avoided.
But it still forecast a contraction of 0.2 percent this year, though it is a significant improvement on the 1.4 percent shrinkage predicted in November.
The OBR also upgraded its growth forecast for 2024 from 1.3 percent to 1.8 percent, but downgraded predictions for the following years to 2.5 percent in 2025, 2.1 percent in 2026, and 1.9 percent in 2027.
It forecast that inflation in the UK will fall from 10.7 percent in the final quarter of last year to 2.9 percent by the end of 2023, partly owing to the impact of the cost-cutting measures.
‘On the Right Track’
Unveiling his Spring Budget in the House of Commons on Wednesday, Chancellor of the Exchequer Jeremy Hunt said the UK economy is “on the right track” and is “proving the doubters wrong.”
Hunt told MPs: “In the face of enormous challenges, I report today on a British economy which is proving the doubters wrong.
“In the autumn, we took difficult decisions to deliver stability and sound money. Since mid-October, 10-year gilt rates have fallen, debt servicing costs are down, mortgage rates are lower, and inflation has peaked.
“The International Monetary Fund says our approach means the UK economy is on the right track.”
He said the OBR forecast shows “we will meet the prime minister’s priorities to halve inflation, reduce debt, and get the economy growing,” adding, “We are following the plan and the plan is working.”
The chancellor said that improvements in public finances means “more money for our public services and a lower burden on future generations.”
He said “declinists are wrong” about the future of the country as he highlighted the country’s “innovation industries.”
He added: “Our film and TV industry has become Europe’s largest, with our creative industries growing at twice the rate of the economy. Our advanced manufacturing industries produce around half the world’s large civil aircraft wings. And thanks to a clean energy miracle, we have become a world leader in offshore wind.
“Other parties talk about a green energy revolution, so I gently remind them that nearly 90 percent of our solar power was installed in the last 13 years, showing it’s the Conservatives who fix the roof while the sun is shining.”
Living Standards Falling
But living standards are still expected to fall by the largest amount since records began, though the decline is not as bad as had been forecast in November.
The OBR said real household disposable income (RHDI) per person is expected to fall by a cumulative 5.7 percent over the two financial years 2022–23 and 2023–24.
“While this is 1.4 percentage points less than forecast in November, it would still be the largest two-year fall since records began in 1956–57,” the forecaster said.
“The fall in RHDI per person mainly reflects the rise in the price of energy and other tradeable goods of which the UK is a net importer, resulting in inflation being above nominal wage growth.
“This means that real living standards are still 0.4 percent lower than their pre-pandemic levels in 2027–28. But they are 0.6 percent higher than we forecast in November thanks to lower market expectations for medium-term gas prices and the upward revision to potential output.”
The OBR said Jeremy Hunt had committed money to “providing more support with energy bills and business investment in the near term, while boosting labour supply in the medium term.”
“This lowers inflation this year and, more significantly, sustainably raises employment and output in the medium term. But it leaves debt falling by only the narrowest of margins in five years’ time.”
‘Papering Over the Cracks’
Commenting on the budget, Labour leader Sir Keir Starmer said: “After 13 years of his government, our economy needed major surgery, but like millions across our country, this budget leaves us stuck in the waiting room with only a sticking plaster to hand.
“A country set on a path of managed decline, falling behind our competitors, the sick man of Europe once again.”
Labour’s shadow chancellor Rachel Reeves said the budget is “just papering over the cracks.”
“This budget was a chance for government to unlock Britain’s promise and potential,” she wrote on Twitter.
“But with growth downgraded, the hit to living standards the largest since records began, and a tax cut for the top 1 percent, they are just papering over the cracks.
“Labour will build a better Britain.”
PA Media contributed to this report.