- Filling the Fiscal Gap May Extend the Low Growth Trap
Since our previous Outlook, we are into our second Prime Minister and our third Chancellor of the Exchequer; we have experienced a mini-budget and its near complete reversal, neither of which involved the analysis and scrutiny of the independent Office for Budget Responsibility (OBR); and we await an Autumn Statement that will be accompanied by an OBR Forecast. This political turmoil has damaged the UK economy by generating higher interest rates and greater economic uncertainty at a time when it was already in a fragile position with low growth and high inflation.
We expect GDP to fall in the third quarter of this year but to grow from the fourth quarter of this year and beyond. We expect year-on-year growth of 4.6 per cent in 2022, 0.7 per cent in 2023 and 1.7 per cent in 2024. All that said, the risk of a recession remains high with a roughly 55 per cent probability of negative annual growth in the first quarter of 2023.
The Energy Price Guarantee (EPG) has lowered the peak in CPI inflation, which we now expect to be 11 per cent in January 2023. Nonetheless, we think inflation is likely to be more persistent than previously forecasted, only falling to 5.7 per cent by the end of 2023 and not reaching the Bank of England’s target of 2 per cent until the third quarter of 2025.
Given the greater persistence in inflation, there is a greater risk of high inflation becoming embedded in expectations. The Monetary Policy Committee (MPC) will need to monitor the situation closely and be prepared to raise interest rates by more and more quickly if necessary to stop this from happening. At the same time, the Bank of England needs to start normalising its balance sheet, so we support the MPC’s decision to start quantitative tightening on 1 November.
We project that nearly 1 in 5 households will have little or no savings by April 2024: faced with the triple shock of soaring energy, food and mortgage rates/rental costs, nearly six million households will see their savings fall to negligible levels despite the Energy Price Guarantee (EPG) and other support measures.