The UK will avoid a technical recession in 2023, chancellor Jeremy Hunt said in his Spring Statement, proof the economy was “proving the doubters wrong”.
Despite avoiding the two consecutive quarters of decline that make a technical recession, the Office for Budget Responsibility (OBR) still expects the economy to shrink by 0.2% in 2023.
Still the forecast is far more upbeat than the statement released by the OBR following the Autumn Budget – in November the OBR predicted the economy would shrink 1.4% in 2023.
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There had already been some encouraging signs the UK economy might not perform as weakly as previously predicted.
GDP unexpectedly rebounded in January thanks to a recovery in the services sector, which proved resilient despite the ongoing cost of living crisis.
But more broadly GDP remained flat in the three months to January 2023, proving the economy isn’t yet out of the woods.
Beyond 2023 the OBR increased its growth forecast for 2024 from 1.3% to 1.8%.
Hunt’s budget focused on growth, offering incentives for people to return to work including scrapping the pension lifetime allowance.
Inflation to fall to 2.9% by end of 2023
The OBR also said it expects inflation to more than halve to 2.9% by the end of the year.
Currently the rate of CPI inflation sits at 10.1%. Though it has climbed down over the last two months it remains near 40 year highs, fuelling the cost of living crisis.
But the forecast seems optimistic.
“The OBR’s inflation forecast is less than half of that expected by the majority of economists,” says George Lagarias, chief economist at Mazars.
“Developed markets as a whole are expected to see year-end inflation above 5% so 2.9% in the UK is ambitious.”
Despite the more optimistic forecast the effects of inflation and the cost of living crisis will be felt until 2024.
The OBR expects incomes to fall 5.7% between 2022 and 2024 once adjusted for inflation – the largest two-year fall since records began in the 1950s.
Wages growth is already beginning to slow and remains miles behind the rate of inflation, which could influence the Bank of England’s decision on where to take interest rates next week.
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