UK economics: recession has begun but will be shallow
Financial markets soothed by Autumn Statement as UK enters recession.
3 minutes to read
The OBR confirmed the UK has likely already entered a recession, but Rishi Sunak and Jeremy Hunt have walked the tightrope of striking the balance between placating financial markets without deepening the economic downturn.
Chancellor Jeremy Hunt unveiled his Autumn Statement (the team and I gave initial reactions and on our podcast) and markets were largely unmoved indicating approval – a stark contrast to his predecessor’s ‘mini budget’.
On the day, gilts and the exchange rate moved marginally, both have since strengthened. At the time of writing, the 10 year gilt was around 3%, where we were at the beginning of September, and the pound was holding above $1.20 for the first time since August.
Recession tempered by support
The forecasts from the OBR confirm that the UK is already likely in a recession but given the measures announced it will be shallow, with GDP falling 1.4% in 2023 before returning to growth of 1.3% in 2024.
This is a much rosier picture than painted by the Bank of England (BoE) recently, with two years of recession. The average forecast is for GDP to contract around 1% in 2023, compared to 4% contraction seen in 2009.
Unemployment is also expected to tick up with the OBR forecast and consensus being that it will peak at 4.9% in 2024, from 3.6% currently.
Short term inflation rises then sharply declines
Inflation could be nearing a peak with the 11.1% in October 2022, which was expected due to energy bills. The confirmation that the Energy Price Guarantee will rise to £3,000 per year (for an average household) in April 2023 for 12 months gives some stability to households and also keeps inflation in check.
The OBR forecasts that inflation will drop sharply over the course of the next year, falling to less than 1% in 2024 and deflation in 2025. This is below consensus, over 2.5% in 2024, but will alleviate some pressure on the Bank of England.
Indications of the peak are that wage demands may start to alleviate with vacancies falling back, global supply chains are easing and oil prices, among other commodities, have fallen back, peeling back inflationary pressure. These will take time to filter through but should show up in headline figures in the first half of 2023 – notwithstanding any further disruption.
Rate hikes to slow pace
The Bank of England has gone from a bank rate of 0.1% at the end of 2021 to 3% currently, with one meeting left in 2022 it is likely we will end the year with a rate of at least 3.5%.
In reference to The Economist article, much of this has already been priced in to lending rates due to forward guidance. The base rate is likely to peak in the first half of 2023, with the markets pricing just 4.5%. However, a recent speech by BoE deputy governor Ben Broadbent indicated that rates may not go that high.
This follows a global rhetoric that peak rates may be near. Many central banks, including Australia and Canada have begun slowing the pace of tightening. It is likely the BoE will increase rates by 50bps in December but perhaps there will be a slowdown in the pace, or a pause, early next year as the impact of the rapid rises feed through the economy.
Given that the OBR forecasts is predicated on the base rate reaching 5% by the middle of 2024, there are some upside potentials to its forecasts.
Read more or get in contact: Flora Harley, residential research
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