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Rising prices will erode real wages and reduce individual disposable income by 7% in total over the two financial years to 2023-24, wiping out the previous eight years’ growth, the Office of Budget Responsibility (OBR) has said in its economic outlook report.
In a post-Autumn Statement presentation, Richard Hughes, chairman of the OBR, said: “This steep fall in living standards happens despite the energy price guarantee and other government support which raise real incomes by 3.5% on average this year and next.”
Inflation will fall
The inflation rate is forecast to be 9.1% this year, and 7.4% next year. Back in March, the OBR had said it expected inflation to average at 7.4% this year and it was just over a year ago that Sunak, as Chancellor, was warning the consumer price index (CPI) could average at 4% this year. Then, the OBR report said that the UK’s exit from the EU had exacerbated problems such as delays at ports or with deliveries.
Today, Chancellor Jeremy Hunt said: “The Office for Budget Responsibility confirms global factors are the primary cause of current inflation. Most countries are still dealing with the fallout from a once-in-a-century pandemic. The furlough scheme, the vaccine rollout, and the response of the NHS did our country proud - but they all have to be paid for. The lasting impact on supply chains has made goods more expensive and fueled inflation. This has been worsened by a Made in Russia energy crisis.”
The OBR did say that inflation would have been higher still, were it not for the government’s energy price guarantee limiting a typical household’s annualised energy bill to £2,500 this winter and £3,000 next winter.
(Image: Contributions to CPI inflation)
Recession will last a year
The OBR confirmed that the economy went into recession from the start of this quarter, predicting that it will last just over a year, with a 2% fall in GDP from peak to trough as a result of the squeeze on real incomes, rise in interest rates, and fall in house prices.
Unemployment is expected to rise by 505,000 from 3.5% to peak at 4.9% in the third quarter of 2024, before falling back to 4.1%.
Hughes said: “[GDP] would have fallen half as much again in the absence of government support. This fall in output is much shallower than those experienced during the pandemic or 2008 financial crisis, but similar in depth to that seen in the recession of the 1990s.”
This weaker outlook, combined with downward revisions to outturn data over the past two years, means that real GDP doesn’t return to its pre-pandemic level until the end of 2024.
Whilst the economy is now officially in recession, it is still expected to have grown 4.2% overall this year. GDP will then fall in 2023 by 1.4% before returning to growth in 2024, rising by 1.3% 2.6% and 2.7% in the following three years.
Debt as a percentage of GDP will peak at 97.6% in 2025/26 and fall back to 93% in 2027/28.
(Image: Real household disposable income growth)
Forecast risks remain high
Hughes admitted “the risks around our forecast right now are large”, adding that a rapid end to Russia’s war in Ukraine would make the outlook considerably brighter as that would stabilise European energy markets, reducing pressure on inflation and interest rates.
He added that if the war means that high energy prices and inflation persist, then there are downside risks to worry about, such as energy support for households and businesses, which he said “could prove difficult to withdraw”.
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