- UK economy slows.
- Living standards delayed.
- Inflation and interest challenges.
The UK economy is expected to expand at a much slower rate than anticipated over the next two years, according to the government’s forecaster, because inflation is declining more slowly than anticipated.
Also, the return to pre-pandemic living standards is not anticipated until 2027-28, according to the Office for Budget Responsibility (OBR).
This follows the Chancellor’s Autumn Statement, in which he announced tax cuts and an increase in benefits.
Labour stated that the public continued to bear the cost of “Tory economic irresponsibility.”
The OBR, an independent government agency, provides two sets of economic estimates annually to predict government budgets.
They are subject to change and are founded on the organisation’s best estimate of future events.
The economy is projected to contract and decline by 0.6% this year, according to the watchdog, which is a significant improvement over its forecast from last autumn when it anticipated a recession and contraction.
Adjusted Development Rates
However, the organisation cut its 2024 and 2025 development rates from 1.8% and 2.5% to 0.7% and 1.4%.
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“Unexpectedly resilient to the shocks of the pandemic and energy crisis has been the economy.” “However, inflation has been more persistent, and interest rates in March were higher than anticipated,” the report continued.
The OBR predicted inflation won’t fall to 2.8% by 2024 or the Bank of England’s 2% target for 2025.
Inflation was previously anticipated to comfortably surpass the target for the following year.
Furthermore, it was projected that the real disposable income of households in the United Kingdom would decline by 3.5% in 2024-25 compared to its level before the pandemic, before recovering to pre-pandemic levels several years later.
Although not as severe as initially anticipated, this decline would nonetheless constitute “the most substantial reduction in real living standards since records began in the 1950s at the Office of National Statistics.”
Growth has been weighed down by a confluence of factors: elevated inflation, escalating interest rates, and waning consumer demand.
In forecasts published earlier this month, the Bank of England was marginally more pessimistic, predicting that the United Kingdom would experience virtually no growth in 2024 and 2025.
In an effort to curb surging price increases, the Bank has raised interest rates fourteen times since December 2021. At its last two meetings, they remained at 5.25%, a level not seen in fifteen years.
The concept is that this increases the cost of obtaining money, which in turn reduces demand and slows price increases. However, increased interest rates also discourage business investment, which can be detrimental to the economy.
Impact on Household Finances
Mortgage rates have increased in tandem with rates for savings accounts, which has placed a strain on households.
This has had an effect on real estate prices, which the OBR projects will decline by approximately 4.7% in 2024.
Chancellor Jeremy Hunt stated in his Autumn Statement that while the United Kingdom was expanding at a higher rate than the eurozone, productivity needed to increase.
He stated that the private sector was more productive in the United States, Germany, and France due to greater investment, but added that his new proposals would “help close that gap” by eliminating planning red tape, assisting entrepreneurs in raising capital, and reducing business taxation.
Mr. Hunt further stated that in both 2024 and 2025, government borrowing and debt, which have increased substantially in tandem with interest rate hikes, would be lower than what the OBR had previously predicted.
“A stronger economy has contributed to a portion of this improvement in the form of increased tax revenues. But we maintain a disciplined approach to public spending as well,” he added.
