The UK enters 2023 on the brink of recession as households and businesses come under intense pressure from the cost of living crisis, with inflation at the highest rates since the early 1980s.
The Bank of England has said the country is on course for a prolonged recession as households struggle to cope with soaring costs for food, energy and other essentials need. Here are five charts for the UK economic outlook in 2023.
Britain entered 2022 with inflation at just over 5% as the aftershock of the Covid pandemic and supply chain issues took their toll. But Russia’s invasion of Ukraine has driven inflation even higher, with energy costs for businesses and consumers reaching exorbitant levels, and inflation peaking at just over 11 % in October – the highest level since 1981.
Most economists expect inflation to ease gradually later this year as the initial shock of Vladimir Putin’s invasion ripples through the system. Inflation is measured as the annual change in the price of a basket of goods and services, which means that the impact of the war in Ukraine from February 2022 will disappear from official figures.
However, lower inflation rates do not necessarily mean lower prices. The cost of living is expected to remain well above pre-Covid levels, with energy bills expected to remain more than double historic levels even after factoring in the government’s energy price guarantee, keeping pressure on households and businesses.
Economic activity has slowed sharply in recent months as consumers tighten their belts in response to the soaring cost of living, while business investment has fallen on concerns about the strength of the UK and global economy .
Britain remains the only G7 economy whose gross domestic product (GDP) is below its pre-pandemic level. The Bank of England expects the recession to last at least through 2023 and the first half of 2024, before only a gradual recovery thereafter.
Continued high energy prices are expected to weigh on activity, while rising borrowing costs for businesses and households after the Bank of England’s sharp rate hikes will also act as a drag. Business leaders warn that business investment will remain weak, with additional headwinds from Brexit bureaucracy and additional costs for exporters.
The economic crisis is expected to drive up unemployment as lower levels of consumer and business spending, along with higher costs, lead employers to make tough decisions about appropriate staffing levels.
However, forecasts of a sharp rise in unemployment come at a time when businesses are struggling to find enough workers, while the public sector is plagued by strikes as the government refuses to budge on wages.
Unemployment is at its lowest level since the 1970s, largely due to rising economic inactivity – when working-age adults are not working or looking for work – after rapid growth early retirements and long-term sickness rates.
Falling labor market participation means Britain is on track to be the only advanced economy with employment still below pre-Covid levels at the start of 2023. Employers responded by raising wages , with annual wage growth close to 6%. However, this is still well below double-digit inflation, which means pay cuts in real terms for most people.
Pressure on household finances from the soaring cost of living has been exacerbated by a steady rise in mortgage interest rates, as the Bank of England raises borrowing costs in response to higher inflation five times its official target rate of 2%.
The Bank ends the year with its base rate at 3.5%, down from just 0.25% at the start of 2022, after the most aggressive rate hike campaign in a generation. Financial markets expect interest rates to peak above 4%, although the central bank may halt hikes at an earlier stage.
These higher costs will ripple through the real estate market as families come to remortgage at higher rates. After a period of strong house price growth, and with weaker economic activity and rising unemployment, economists predict a sharp decline in house prices in 2023.
The Office for Budget Responsibility expects house prices to fall 9% between the end of 2022 and the third quarter of 2024, erasing much of the increase seen since the Covid pandemic. However, the prices will always remain unaffordable for many.
It comes after the housing market was hit by turmoil from Liz Truss’ disastrous mini budget at the end of September, which led to a rapid increase in borrowing costs. Conditions have now eased, although mortgage rates remain significantly higher than in previous years.
Jeremy Hunt has pushed to regain investor confidence in government finances after the Truss mini-budget disaster, using the fall statement to set tight regulations for spending and raise more money through taxes.
However, public borrowing is on track for a significant increase this year as the government spends more to support households and businesses struggling with their energy bills, while inflation drives up utility costs. debt interest.
The budget deficit – the gap between spending and income – is expected to hit £177bn in the financial year to the end of March 2023, nearly £40bn higher than a year earlier, before gradually decreasing over the next few years.
As attention shifts to the upcoming general election as the Tories languish behind Labor in the polls, the government will face pressure to offer more support and tax breaks to ease the economic downturn.