UK households face a “miserable” 2023, according to a majority of leading economists, who forecast that the country will experience a worse recession than most other advanced economies.
Many of the more than 100 experts who responded to an annual Financial Times questionnaire predicted a fall in real incomes, a drop in house prices, and rises in unemployment and borrowing costs this year. Four preferred to comment anonymously.
High inflation, now running at 10.7 per cent, is expected to linger for longer than elsewhere as the UK underperforms most other advanced economies amid high energy prices, a shrinking workforce and stronger interest rates.
While many economists anticipated a weak recovery from the end of the year, the impact of Brexit and poor investment growth are expected to affect the UK’s longer-term economic performance, reducing its prospects for growth and living standards.
Here are the full responses to questions about the economic outlook for 2023.
UK economy: Will the UK economy outpace or lag behind other developed economies in 2023 and how will it feel for households?
Silvia Ardagna, head of European economics at Barclays: Lag behind the US but contract together with the euro area. We forecast a five-quarter recession with peak-to-trough contraction in real gross domestic product of about 1 per cent. Households’ consumption is contracting and is the main determinant of the recession.
Kate Barker, pension trustee at BCSSS: The UK likely to lag other economies — productivity growth seems unlikely to pick up. Households without savings from the Covid-19 period and especially those with mortgages will continue to struggle.
Nicholas Barr, professor of public economics at London School of Economics (LSE): Growth in the UK will be below the average for the G7 and EU. Households will feel the effects acutely: the second year of poor economic performance coming on top of falling real pay in 2022 will adversely affect living standards both in reality and perception.
Ray Barrell, emeritus professor of economics and finance at Brunel University: UK growth is likely to lag other developed economies in 2023. The shadow of Brexit will continue to reduce growth by up to half a per cent a year for two or three more years. Unwise short-term actions combined with poor long-term planning over the last 10 years leave the UK more vulnerable to shocks than other developed countries. We lack the social insurance of large gas stocks. Uncertainty about the wisdom of policymakers will persist after the [Liz] Truss experiment. Encouraging public sector strikes raises uncertainty, but it is probably the last bid for middle-class votes by a failing government. All hinder growth prospects and will impact on household living standards. Real disposable incomes are likely to continue to fall next year.
Charlie Bean, professor of economics at LSE: Lag, as I fear inflation will prove to be somewhat more persistent here, necessitating a continued period of weak/negative growth and rising unemployment. This is mainly a reflection of the huge external energy and food price shock, but also of the substantial rise in inactivity as a result of the pandemic, which meant that the labour market was unsustainably tight even in the absence of the Ukraine shock. In any case, households will in all likelihood continue to see falling real incomes for some while yet.
Martin Beck, chief economic adviser to the EY ITEM Club: The economic headwinds facing the UK — high inflation, expensive energy, falling real incomes and depressed consumer and business confidence — are shared by most other advanced economies. So we don’t think there’s any major reason why the UK economy should markedly underperform its peers. That UK GDP has recovered more slowly than elsewhere from the pandemic offers more room for catch-up growth and offers one potential source of outperformance. But much depends on the labour market and whether the rise in inactivity over the last few years, which has been less of a feature in other countries, reverses.
David Bell, emeritus professor of economics at the University of Stirling: Lag behind. Households will continue to feel the effect of declining real wages throughout 2023. Inflation will fall sharply as recession bites so long as there is no repeat of recent supply-side shocks. The decline in real household incomes will moderate, but will continue into 2024. Those at the lower end of the income distribution and those who experience a sharp increase in mortgage payments will be particularly affected. Negative equity, not seen since the early 1990s, is a real possibility.
Aveek Bhattacharya, research director at the Social Market Foundation: The consensus among forecasters seems to be that the UK economy will perform less well than peer countries in the year ahead. With incomes failing to keep up with inflation, the year ahead is likely to feel incredibly tough for many — perhaps most — households. The Office for Budget Responsibility’s forecast of a 7 per cent cumulative decline in real household income over the next two years is unlike anything most of us have seen or remembered in this country.
Danny Blanchflower, professor of economics at Dartmouth College and former member of the Bank of England’s Monetary Policy Committee: The UK is likely to be in a deep recession through all of 2023 and likely will be the worst performing country in the G7.
Philip Booth, professor of finance, public policy and ethics at St. Mary’s University, Twickenham: It will feel grim for households. We have had a genuine episode of inflation caused by monetary laxity combined with a supply shock. It is the reality of the supply shock which means that living standards will fall and wage increases will remain behind price increases. Towards the end of 2023, things could improve. There is unlikely to be another energy supply shock and the current one may reverse.
Andrew Brigden, chief economist at Fathom Consulting: The UK is likely to be in the bottom half of the table when it comes to growth across the major economies in 2023. The UK looks to have entered a recession during the second half of this year, with activity peaking in the spring. The economy is likely to continue to contract for much, if not all, of next year. As a more substantial net importer of energy, the euro area is more directly exposed to the consequences of the war in Ukraine, and yet the UK faces its own headwinds from Brexit and from a fall in participation, particularly among older age groups, both of which have reduced potential supply. The US is likely to be at or near the top of the tree and may even escape recession. It will be a difficult year for UK households. Consumer confidence is already at or close to historic lows, and that is before unemployment has started to rise, and before any material fall in house prices.
George Buckley, chief UK economist at Nomura: We see a year-and-a-half-long recession in the UK having started in the third quarter of 2022, with growth only resuming again from early 2024. Our peak to trough in UK GDP is around 2 per cent. We see a contraction of 1.5 per cent in GDP in full-year 2023, which is similar to our euro area forecast but weaker than our US view.
Robin Carey, head of the School of Business at the University of Central Lancashire: The current UK economy is very fragile. There has been a lack of solid economic and energy policies since the second world war, and the current turbulence within the government and wider socio-economic environment has made matters worse. The approaches to the UK economy that we are seeing tend to be short-term. There needs to be better investment in infrastructure and new energy sources to solve the challenges at hand and to build a sustainable future. The current economic challenges facing Britain will be felt by families across our nation. The volatility of our markets and difficulties across our supply chains will lead to problems in people’s everyday lives. We will see longer waiting times for goods, and a rise in costs for households.
Jagjit Chadha, director of the National Institute of Economic and Social Research (NIESR): It will be a very difficult year for households, particularly those at the lower end of the income distribution. As there is a sharp fall in real disposable income, that will exhaust savings that will also be depleted by rising housing costs. Given the regional distribution of income, this will also act as a regional-specific shock that will increase the pressure to act on “levelling up”.
Victoria Clarke, UK chief economist at Santander Corporate and Investment Banking: We expect the UK to underperform other developed market economies in 2023. In the UK, relatively slow-to-fall inflation will mean that the very significant real income squeeze will continue for longer than in many of the UK’s developed market peers. In addition, the impact of 2022’s interest rate increases, with Bank rate now 325 basis points higher than where it started in 2022, will apply a material squeeze to household budgets, on top of the impact of inflation. For many businesses, the list of pressures faced is similar. Businesses should find some relief from falling goods price inflation in 2023, but strong labour cost inflation may force firms to adjust production, impacting overall economic activity and slowly lifting unemployment. Over time, higher unit labour costs could spur greater capital investment but not in 2023, we believe, with firms focused on their bottom lines. Overall, we expect that the economy entered a recession in the second half of 2022, which we think will continue through the first half of 2023. We forecast a contraction in GDP of 1.5 per cent over 2023.
David Cobham, professor of economics at Heriot-Watt University: It will continue to lag behind, and most households will feel hard up, as austerity and Brexit come home to roost and the government has no coherent strategy for dealing with (never mind reversing) their effects.
Anonymous: Because of the long shadow of Brexit, and the uncertain consequences of the energy crisis/war, the UK cannot be expected to outpace other developed economies in the next few years. Of course, that will depend crucially on what happens in the eurozone.
Diane Coyle, Bennett professor of public policy at the University of Cambridge: The UK will lag behind most others; we face a large terms of trade shock on top of a cyclical downturn and our longstanding relatively poor productivity performance. The reality for most households will be (yet another) year of no increase in real living standards. It will feel bleak for many.
Bronwyn Curtis, non-executive director at the Office for Budget Responsibility: The UK economy is likely to lag other developed economies. Weak business investment has dogged the economy and I expect that to continue over the coming years. Consumers are facing higher goods and services costs, higher energy costs and falling real wages — and that’s before they face higher mortgage costs as fixed-rate mortgages at very low interest rates roll off. House prices are set to fall again, further dampening consumer confidence. Discontented is the word I would use for households even if employment rates remain relatively high.
Paul Dales, chief UK economist at Capital Economics: It will lag. The only reason why the GDP growth figures made it look like it outperformed in 2022 was because it underperformed so much in 2020! I think the UK will endure a recession involving a peak-to-trough fall in real GDP of 2 per cent. GDP in the eurozone may decline by 1 per cent. In the US, it may fall by just 0.5 per cent.
Richard Davies, director of Economics Observatory: I’m hoping that global macro forecasters eg the OECD are too pessimistic and that the UK will keep track of other developed nations. My rose-tinted case is that the labour market remains resilient, household balance sheets are strong and higher mortgage payments don’t damp down consumer expenditure as much as many are predicting. Households are still going to feel the pressure — via lower real wages, that is — once inflation recedes, due to the step change in some prices. I think this may cause some debate/concern in 2023, with people complaining that even though inflation is lower, prices are still higher.
Howard Davies, chair of NatWest: We will lag, quite a lot. And the big question this year will be how to share the pain of declining real incomes. The public sector is bearing a heavy burden so far, but that may prove politically intolerable.
Panicos Demetriades, emeritus professor of financial economics at the University of Leicester: With the UK being the only G7 economy that, as at November 22, remains smaller than its pre-pandemic level, it is hard to see how the UK economy could outpace other developed economies in 2023. Since the decision to exit the EU, itself a historical economic policy blunder, I have little, if any confidence, in the UK’s macroeconomic management. At best, it is in the hands of politicians who put special interests or party politics above the country’s long-term interests. At worst, it is in the hands of incompetent politicians, with a good example being the seven-week-long experiment in “Trussonomics”. Although prime minister Rishi Sunak’s government appears to be more competent than its two predecessors, by now the economy is in much deeper trouble than it needed to be had it been competently managed. Sunak’s also remains a pro-Brexit government, which, by itself, inspires little confidence in their economic or indeed political judgment.
As a result of the above, the Bank of England faces a bigger poisoned chalice than, say, the European Central Bank or the Federal Reserve, in that it may have to raise interest rates more than other leading central banks, in order to safeguard the credibility of monetary policy in the face of question marks over fiscal policy. In November 2022, the UK’s GDP was 0.4 per cent lower than its pre-pandemic level. In sharp contrast, the US GDP was 4.3 per cent higher and the eurozone’s 2.2 per cent higher than their respective pre-pandemic levels. The UK appears to be the “sick man” of the G7 and I cannot see that changing while the economic policy remains in the hands of Brexiters. As far as households are concerned, it is very clear that we are heading for possibly the worst-ever cost of living crisis, with living standards set for the largest fall on record, due to rapid inflation in energy and food, which will be made worse by the rise in borrowing costs.
Colin Ellis, global credit strategist at Moody’s Investors Service: UK growth will lag the US and most of Europe. It is already feeling very painful for many households, and that will only get worse in the short term as the government’s energy price cap ends in March.
Martin Ellison, professor of economics at the University of Oxford: There’s plenty of storm clouds over the UK and precious little reason for optimism. With a talentless government and no softening of policy towards the EU yet on the horizon, the outlook is dire. The UK will do well to avoid the wooden spoon in the G7 growth league.
Noble Francis, economics director at the Construction Products Association: It will be a challenging 2023 for all major developed economies with GDP remaining flat or marginal growth at best in the coming year due to the impacts of inflation and interest rate rises. However, UK GDP is likely to contract by 1.0 per cent in 2023, representing a shallow recession but it will feel worse for households suffering a second year of real wage falls, particularly for poorer households for whom rising energy and food prices represent a greater proportion of income.
Marina Della Giusta, professor of economics at the University of Turin and the University of Reading: Lag behind, with poorer households particularly at a disadvantage.
Anonymous: Lag behind. Households will come under strain.
Andrew Goodwin, chief UK economist at Oxford Economics: We expect the UK to be one of the worst performing developed economies in 2023, with only Canada and Germany seeing larger contractions in GDP among the G7. High inflation will mean another large fall in real household disposable income, while policy settings will be tight. The full impact of 2022’s tightening of monetary policy is still to be seen, and we expect another 50bp of rate hikes in early-2023. And though the Autumn Statement added little new tightening in 2023, the combination of the withdrawal of pandemic and energy-related support and tax rises announced by previous chancellors means the fiscal stance will be much tighter next year. Households will find life very tough. Another steep fall in real income will come on the back of what has already been the largest squeeze on spending power since the second world war. Unemployment is likely to rise, albeit quite modestly. And homeowners coming to the end of fixed-rate mortgage deals are likely to be offered new deals with interest rates that are at least 300bp higher than their old ones.
Paul De Grauwe, John Paulson chair in European political economy at LSE: The UK economy is likely to lag behind other developed economies in 2023 because of the increasing negative resonance of Brexit. Households will pay the brunt of the long-term costs of Brexit.
Oliver de Groot, chair in macroeconomics at University of Liverpool Management School: The UK economy is likely to be in recession for much of 2023. The squeeze on household finances in 2022 is likely to persist in 2023, leading to a prolonged decline in consumer spending.
Anonymous: The UK economy will lag other DM economies in 2023, with households feeling increased job security but greater pressure on their finances.
Brian Hilliard, chief UK economist at Société Générale: Lag and it will feel terrible for households.
Jessica Hinds, economist at Fitch Ratings: The UK will lag the US and Europe and will suffer a deeper recession. It looks set to be a very tough year for households, who face rising energy and food bills as well as higher mortgage rates and an increase in unemployment.
Paul Hollingsworth, chief European economist at BNP Paribas: The UK looks set to remain the laggard in 2023 as a combination of cyclical headwinds and structural issues take their toll. As for households, we expect 2023 to be another relatively bleak year. Households have already been dealt a significant blow to their purchasing power from rampant inflation. Next year we will see more clearly the effects of monetary policy tightening play out, especially in the housing market. To be clear, we think this will be a synchronised global slowdown (the UK isn’t alone) — but we expect the UK to nonetheless lag behind.
Ethan Ilzetzki, associate professor of economics at LSE: The UK will lag behind other developed economies in 2023. Covid has left greater scars on the UK workforce than most other countries and Brexit uncertainty will continue to be a drag on the economy unless the government finally acknowledges this problem and negotiates better relationships with our EU trading partners.
Dhaval Joshi, chief strategist at BCA Research: Lag. The UK (and the US) is suffering a structural shortage of workers caused by “excess early retirements” during the pandemic. The only way to rebalance the labour market — and kill wage inflation — is to kill labour demand, meaning take the economy into recession. The euro area and Japan do not have the same structural problem with their labour markets as do the UK (and the US), so their downturns will be milder than in the UK and the US. For UK households, 2023 will be a year when the main concern shifts from inflation to recession.
DeAnne Julius, distinguished fellow at Chatham House: I expect the UK will be about the same (shallow recession) as other European economies in 2023.
Stephen King, senior economic adviser at HSBC: Lag behind, not helped by the painful need to restore fiscal credibility in the light of the Truss/Kwarteng fiasco.
Lena Komileva, chief economist at G+ Economics: With the weakest productivity per capita, combined with the highest structural inflation problem among major economies, the UK economy is clearly a laggard. The issue is not labour, it is structural rigidity, eg government policy, ranging from Brexit to social inequality.
Barret Kupelian, senior economist at PwC UK: Despite a relatively buoyant labour market, UK households will remain cautious. There are quite a few reasons to be less cheery about households including the continued real wage contraction, house price decreases (with associated negative wealth effects), the household savings ratio remaining relatively constant (in view of decreasing house prices) and the generally uncertain mood on the outlook. Households make up the largest proportion of the UK economic activity by far, so if households don’t spend the economy suffers.
Anna Leach, deputy chief economist at the CBI: The UK economy is likely to lag other developed economies in 2023. In particular, the tightness in the labour market — reflecting both changes in the composition of migration, those taking early retirement and potential shortcomings in healthcare provision — doesn’t look likely to improve markedly in the near term. This will continue to apply a break to growth for companies, drive industrial unrest and push up domestically generated inflationary pressures. For households, it’ll come down to wage settlements vs inflation. Inflation “should” come down swiftly next year even after government support expires, provided there aren’t further global shocks in energy markets — a pretty big proviso. The sharpness of the decline in real incomes based on current projections will constrain household confidence and discretionary spending significantly. It will be a tough year.
Warwick Lightfoot, independent economist: UK economic activity will be relatively weak as a result of discretionary tightening in fiscal policy, raising taxes, weaker terms of trade, and a weaker supply performance arising from a higher ratio of general government expenditure to output, a less neutral and more complex tax regime that will aggravate the deadweight cost of financing a larger public sector.
John Llewellyn, partner at Independent Economics (formerly Llewellyn Consulting): Lag. Households will feel a continuing gap between inflation and the evolution of their incomes. And when they visit the EU on holiday, they will be surprised at how unable they are to afford things that they used to be able to.
Gerard Lyons, chief economic strategist at Netwealth: I don’t expect the UK to either outperform or lag other major western countries over the next year. That is because the challenges confronting the UK are similar to those faced elsewhere. In terms of the main macroeconomic variables such as growth, jobs and inflation the UK’s relative performance is likely be in the middle of the pack when compared with the other major western European economies. It will be a tough year for household incomes, for similar reasons to those we have already seen during 2022. In fact, 2023 may prove to be the year of the good, the bad and the uncertain for the UK. The good is that inflation has peaked and looks set to decelerate significantly, the bad that growth will be weak with recession likely and the uncertain being how fragile or resilient the jobs, financial and property markets prove to be.
Stephen Machin, professor of economics and director of the Centre for Economic Performance at LSE: It seems likely to lag behind, as it faces additional pressures (supply chain disruptions, Brexit) compared to other developed economies. Lagging behind would put households in an even more adverse position and, since these effects vary across the income distribution, affect inequality.
Chris Martin, professor of economics at University of Bath: I fear the UK economy will continue to stagnate until serious measures to promote productivity growth, around education, training and investment, are put in place. Households will increasingly realise the UK is declining in comparison to other countries; household real incomes will probably not notice any real income growth for the next couple of years.
David Meenagh, reader in economics at Cardiff University: The UK will grow less than most developed countries in 2023 and this will have a detrimental effect on households.
Costas Milas, professor of finance at the University of Liverpool: It will lag behind other developed economies. A combination of higher inflation (due to the war in Ukraine but also due to Brexit) together with lower real wages will affect households negatively. There is, however, a way of boosting the economy. Since the EU remains UK’s main trade partner, it makes sense for us to reduce trade frictions with Brussels. To do so, Sunak needs to sidestep his Brexiteer MPs. How to do this? Sunak could commission a detailed survey asking UK businesses to choose/name their preferred trade relationship with their counterparts in Europe. At the end of the day, UK businesses have a much better idea than Brexiteer (or even non-Brexiteer!) MPs on how to fire up the economy.
Stephen Millard, deputy director for macroeconomic modelling and forecasting at NIESR: The UK is likely to grow — but by very little — over 2023 and this will be roughly in line with other developed economies. Unfortunately, with real incomes continuing to fall, it will feel like a very tough year for households.
Andrew Mountford, professor at Royal Holloway, University of London: I expect that the UK will continue to lag behind most other developed economies for the same reasons that it has underperformed them this year. The UK is facing the same global headwinds as other countries but is additionally hampered by: 1) reduced investment from Brexit; 2) a sicker, less productive workforce due to a public sector that is suffering from significant and prolonged under-investment and the consequence of the UK’s relatively poor management of the pandemic; 3) a greater level of industrial unrest in the UK than elsewhere due to the UK’s high income inequality and relatively low standard of living for median UK households coupled with the inability of policymakers to mitigate the effect of energy price rises effectively.
John Muellbauer, professor of economics at the University of Oxford: The UK will lag behind major other G7 economies for multiple reasons including Brexit and its interaction with the pandemic, and 12 years of under-investment, especially in health and infrastructure.
Gulnur Muradoglu, professor of finance at Queen Mary University of London: It will be very hard for households. Note that household expenditure inflation is much higher than the average 11 per cent.
Andrew Oswald, professor of economics and behavioural science at the University of Warwick: I expect it to lag behind. How things will feel for a household depends on wealth and location. I tried to get a dinner reservation in a number of expensive London restaurants recently and struggled to find a table. Our country is characterised by a striking level of inequality. But the median household will feel the pain of a drop in real income of about 5 per cent. We know from behavioural science evidence that humans exhibit extreme loss aversion.
David Page, head of macro research at Axa Investment Managers: We expect the UK economy to lag behind the pace of other economies in 2023. While the UK is not likely to be as directly impacted by the energy crisis as some countries across the eurozone, we think the impact on real incomes — already the sharpest since the second world war on many metrics — will see persistent contraction over the summer. Fundamentally, as well as the impact of more expensive gas, which feeds through more directly to UK retail prices than in other economies, the UK has not offset the material impact of Brexit and this is weighing on the economy’s ability to grow at its previous pace without generating inflation. With household incomes already squeezed and the only way for the Bank of England to restore longer-term price stability to soften a tight labour market, 2023 might be a tough year for households to live through although should be showing signs of improvement towards the year-end, particularly compared to the end of this year.
Alpesh Paleja, lead economist at the CBI: We expect UK growth to be near the bottom of the pack over 2023. Higher inflation will linger for longer, leading to a drawn-out hit to households’ real incomes. While the squeeze should alleviate as the year progresses, it’s still likely to be another tough year for many households. Those towards the lower end of the income distribution will feel the pain most, not benefiting from the cushion of higher savings seen by their wealthier counterparts. Weaker household spending will also mean a tough trading environment for many businesses, particularly consumer-facing ones.
John Philpott, director of The Jobs economist: Lag behind because of a relatively hard squeeze on household incomes from a combination of falling real wages, higher interest rates and tax-raising measures. The 2023 recession will feel much worse than the economic impact of the pandemic.
Kallum Pickering, senior economist at Berenberg Bank: The ongoing recession that started in Q3 2022 appears to be slightly deeper in the UK than in other major European economies. In addition to the global energy shock which hits all major European economies, financial conditions have tightened more in the UK than elsewhere. This is due to the BoE’s earlier and more aggressive tightening to curb inflation, compared to the European Central Bank, as well as the lasting shock to money and credit markets following the “mini” Budget on September 23. The current situation for households is tough. The combination of falling real wages, tight financial conditions and housing market correction are as bad as it gets. However, the pain is likely to ease through next year as inflation rolls over and financing conditions ease a little. From early summer onwards, once the recession gives way to recovery, UK economic momentum should roughly keep pace with the broader European recovery.
Christopher Pissarides, regius professor of economics at LSE and 2010 Nobel laureate: It will lag behind the US and very likely the EU. The main reason is the problems in the labour market, which are more serious here. Households will feel a fall in their living standards, which, however small, will make them feel worse.
Ian Plenderleith, former MPC member: Lag behind, because of continuing labour shortage and low productivity. Households will continue to feel under stress (inflation, high energy costs), but no worse than at present because of continuing high employment.
Jonathan Portes, professor of economics and public policy at King’s College London: The UK’s relative underperformance is likely to persist. Brexit will continue to be a “slow puncture” for the UK economy, and to the extent that the fall in labour force participation has been driven by the NHS crisis, this is also likely to continue to be a drag on growth. The squeeze on household incomes will continue, although cushioned by the energy price guarantee, relatively high nominal wage growth in the private sector, and inflation-linked increase in benefits and pensions.
Richard Portes, professor of economics at London Business School: Lag. We are entering demand-driven recession. Households will continue to feel severe real income squeeze. Though the inflation rate will come down significantly, the price level rise will of course not be reversed, and wages will not catch up with it. Of course, taxes will also rise.
Vicky Pryce, chief economic adviser at the Centre for Economics and Business Research (Cebr) and former joint head of the Government Economic Service: The UK looks set to do worse than many other developed economies. The war in Ukraine brought the post-Covid global recovery to an abrupt end but the UK is one of the few countries to now have both a tighter monetary stance and a significantly tighter fiscal stance that therefore allows little room for growth. Add to that the impact of Brexit and it is not difficult to see why the UK will struggle more than most. Cost of living issues are affecting countries across the board but here wages, particularly in the public sector, are falling seriously behind while, by comparison to other countries, the support with energy and other costs for businesses and the consumer has been both patchy and limited. What is more, the extent of continued support, such as it is, remains uncertain into 2023. Some consumers do have savings they have accumulated during the Covid years but those will soon begin to run thin and in any case, people at the lower end of the pay scale have no savings to speak of and food and energy price increases are hitting them disproportionately. Real household disposable incomes are being severely squeezed. Inequality, which had been falling, is on the increase again. And with house prices also predicted to fall sharply as mortgage rate hikes take their toll, even the positive wealth effect we have seen that generally encouraged consumption during Covid and beyond will turn negative.
Thomas Pugh, UK economist at RSM UK: The UK is the only G7 country where quarterly GDP has not exceeded its pre-pandemic level and it will remain at the bottom of the pack for the next year. Admittedly, some of this relates to measurement issues. But most of it is due to lower household spending, which itself is a result of employment in the UK growing more slowly than in other places and higher inflation as well as lower consumer confidence. All these factors are likely to continue into 2023. What’s more, fiscal policy is likely to be considerably tighter in the UK than in comparable countries over the next year. As a result, GDP is likely to drop by around 1.5 per cent in 2023, compared to annual growth of 0.5 per cent in the US and 0 per cent in the eurozone.
Households’ disposable incomes will continue to be hammered by inflation, which although now falling, will still average around 7.5 per cent in 2023.
As if that wasn’t enough, the surge in mortgage rates will further weaken households’ disposable incomes. Mortgage rates have advanced well ahead of the base rate, as banks anticipate higher interest rates — meaning that anyone unlucky enough to be mortgaging over the next few months will see a potentially larger than expected share of their income spent on the soaring mortgage interest. What’s more, a loosening labour market — as firms reduce hiring and even start to cut workforce numbers — will result in nominal wage growth dropping back to more “normal” levels. Throw in higher taxes and a real-terms reduction in public sector pay, and the 2023 outlook is bleak for households’ real disposable income. All in, we are expecting RHDI to contract by 2.5 per cent in 2023. This would be the biggest fall on record.
Sonali Punhani, head of UK economics at Credit Suisse: We expect the UK economy to lag behind other developed economies in 2023 and be in a year-long recession with a peak-to-trough GDP decline of 2 per cent. The contraction in activity would be driven by the real income squeeze on consumers and businesses, monetary tightening by the BoE and weaker external demand. Household incomes are likely to be squeezed by a combination of still high inflation and high interest rates, thereby falling by record amounts of around 3 per cent in 2023. This should constrain the ability of households to spend, though high levels of savings, tight labour markets and fiscal policy should reduce the severity of the shock. In our view, the impact of monetary tightening on household cash flows will accelerate in 2023 as fixed-rate mortgages roll off, with household mortgage debt service 2.2 percentage points of disposable income higher in late 2023 compared to now.
Morten O. Ravn, professor of economics at University College London: The UK has taken a larger hit from Covid-19 and from the cost of living crisis than most other developed economies. It should therefore in principle outpace other countries in the recovery phase which hopefully will start in 2023. However, this will be hampered by the need for a contractionary monetary policy stance, fiscal austerity, as well as the continuing negative consequences of Brexit. Therefore, the outlook is mixed and there is a significant risk that the UK will lag behind other developed economies.
John Van Reenen, Ronald Coase chair in economics at LSE: The UK will lag behind other developed countries. Things will feel tough for households, not because of this (people don’t do international comparisons), but because it will be worse than the last few years, which have also been pretty awful.
Ricardo Reis, AW Phillips professor of economics at LSE: Lag, since the UK suffers from an energy shock as bad as Europe’s, an inflation problem requiring tighter monetary policy as bad as the US, and a unique problem of lack of labour supply from the combination of Brexit and the NHS crisis.
Anonymous: Lag behind and feel uncomfortable.
Matthew Ryan, head of market strategy at Ebury: I expect the UK economy to lag slightly behind its major peers, but hold up better than currently expected in 2023. The UK labour market is strong, and consumers are resilient, while a smaller squeeze on real incomes should ease the pain for households. A technical recession appears inevitable, though I don’t believe it will be as bad as the BoE is indicating.
Jumana Saleheen, chief economist and head of investment strategy group, Europe at Vanguard: 2023 will be a year of disinflation at a cost: inflation will come down in 2023 but it will come at the cost of a recession. We expect the recession in the UK to be worse — longer and deeper — than other developed economies such as the US and euro area. The UK is forecast to be the laggard for three reasons: (a) momentum in the economy has been weaker than other developed economies. UK output is still below its pre-pandemic level; (b) as a net importer of natural gas, with few storage facilities, the UK has suffered more from the energy crisis than the eurozone. The US is different because it is a net exporter of oil and natural gas; and (c) the structure of the housing and mortgage market in the UK is such that the pass-through from higher interest rates to household income is faster than elsewhere. We estimate that 35-40 per cent of UK mortgages will have to be re-priced at higher rates by the end of 2023, lowering their disposable income by 10 per cent on average. It will be a challenging year for households as they erode their savings and experience unprecedented falls in their real income.
Michael Saunders, senior adviser at Oxford Economics: The UK economy is likely to be weaker than most developed economies in 2023. The coming year will feel miserable for UK households, with falling real incomes, falling house prices and rising unemployment. Apart from cyclical factors, the underlying problem for the UK economy is persistently weak potential output growth, which has been further reduced by Brexit — and especially the government’s choice of a relatively hard Brexit — and the pandemic. The UK government currently lacks a serious plan to address this underlying issue of persistently low potential growth. Such a plan should probably focus on closer trade links with the EU, following OECD advice to prioritise training, education and public investment, and measures to reverse the rise in long-term sickness to lift workforce participation.
Yael Selfin, chief economist at KPMG: The UK economy is in an unfortunate position. It is relatively exposed to higher gas prices, as a result of the invasion of Ukraine, while has also seen base interest rates rise steeply, which could result in a sharper decline in GDP in 2023 here compared to other developed economies. UK households are generally more exposed to the sharp rise in mortgage rates, with just under 50 per cent of mortgage holders expected to experience higher mortgage costs by the end of 2023 despite the fact that most mortgages are now fixed. Households will also see their purchasing power decline further in 2023, as wage increases will not reach high enough to meet inflation for most workers.
Andrew Sentance, senior adviser at Cambridge Econometrics: I expect the UK economy to contract by 1-1.5 per cent on a calendar-year basis in 2023. All major western economies face some sort of recession driven by the squeeze on consumer spending from high inflation and the associated uncertainty affecting business investment. I would expect the UK to be similarly affected as other European economies. The US may get off more lightly because of its historic economic dynamism and the fact that inflation has not risen as high in Europe.
Philip Shaw, chief economist at Investec: The UK looks set to lag behind. Inflation is hitting British households harder than in other countries, not least due to the UK’s greater exposure to natural gas prices and despite a considerable degree of government intervention to keep bills down. It is difficult to envisage anything but consumers struggling after a second successive year of real household net incomes declining by around 3.5 per cent.
Andrew Simms, co-director of the New Weather Institute and research associate at the Centre for Global Political Economy, Sussex University: The UK has voluntarily placed itself at a disadvantage in relation to other developed economies in two key ways: firstly by not revisiting the self-harm of Brexit, even though public opinion has now swung decisively to see leaving the EU as a mistake, and secondly by leaving firms and households exposed to high energy costs through a succession of policy failures. In considering whether or not the UK economy will ‘outpace or lag behind’ others the vital caveat is to ask ‘with regard to what?’ The international scientific community has determined this to be the last decade available for meaningful action to preserve a habitable climate, so the only meaningful measure of success is the UK’s relative performance at meeting economic needs, and ensuring the quality of life whilst hitting climate targets. No developed economy is doing enough — current plans see the world overshooting both the 1.5C and 2C climate targets. But for comparison, the US has the tellingly titled Inflation Reduction Act that includes a massive $369bn package of investments into climate-related measures, while the EU has the Green Deal investment plan with €503bn allocated to climate and environment from the EU 2021-2027 budget, 25 per cent of the total budget, and including €100bn over the same period for a Just Transition Mechanism to ease the process of change. South Korea, meanwhile, has a Korean New Deal, or “K-New Deal” backed by a US$135bn investment programme that includes measures to create 659,000 new green jobs by 2025.
At the same time, the UK is missing key opportunities to ease economic pressures and spur positive, ecologically viable activity. Policy has been actively spurned to shift demand away from high-energy, polluting goods, increase energy efficiency and realise the potential of cost, carbon and pollution-saving behaviour change. Lifting the fracking ban and clinging on to North Sea oil and gas contradicts climate goals and slows the transition to cleaner, cheaper and more employment-intensive renewable alternatives. Gifting energy companies excess profits via household energy subsidies, instead of investing in massive housing retrofit and the heat pump revolution, is another missed opportunity. To properly answer this question would need an international index measuring transition to zero carbon, high wellbeing economies.
Nina Skero, chief executive of Cebr: Cebr is expecting the UK’s economic performance to roughly match or slightly lag behind those of major European countries, while lagging the growth rates seen in the US more significantly. In terms of how 2023 will be experienced by households, the anticipated inflationary and wage trends are exacerbating the quality of life differences between the poor and the more affluent. Those that are relatively well off are seeing higher wage rises and, in some cases, still have Covid savings to dip into. On the other hand, poorer households are seeing staggering real wage declines and struggling to cover the costs of essential items. Rising mortgage rates (and a potential shortage of rental units) will add significantly to the cost of living for households across the income spectrum.
James Smith, research director at the Resolution Foundation: The UK is suffering from a perfect storm of European energy price inflation and a US-style tight labour market. The former will leave us permanently poorer; the latter means high inflation will last for longer. All this, combined with the ongoing Brexit disruption and exposure to spillovers from aggressive global monetary tightening, means the UK looks likely to underperform other major advanced economies. The good news is that global inflationary pressure could whipsaw this year, with the possibility that global inflation headwinds could become tailwinds. But even if the worst of the imported inflation may be behind us, things will get worse for households in 2023. While wholesale energy prices have been falling, families must get ready for the largest rise in retail prices on record. And the lasting high inflation is set to mean wages will be falling for the bulk of this year. This will hurt all families. But the pain could become more concentrated if unemployment starts to rise. The other big shift for families will be rising mortgage costs, with around 3mn mortgages subject to rising interest rates.
James Smith, economist at ING: We expect the UK economy to contract by a little over 1.5 per cent next year, and that doesn’t look particularly different to Europe. Ultimately, a lot will depend on the relative support offered by different governments for household/business energy prices. The UK’s decision to make energy support less generous, combined with higher mortgage rates, looks set to deliver weaker consumer spending through the first half of the year. The manufacturing and construction sectors are both likely to take a hit too.
Andrew Smithers, author: The trend growth rate of the UK is probably the slowest of major developed economies and this is likely to result in the country’s growth lagging.
Alfie Stirling, chief economist at the New Economics Foundation: The UK economy will lag other developed countries, largely on account of having the wrong policy mix. The combination of tight monetary policy and fiscal policy at the same time risks deepening the recession and delaying the recovery. This will mean a higher degree of financial hardship for families in the UK compared with similar economies, including lower pay, weaker income support, more unemployment and higher mortgage costs than might otherwise be the case.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown: The UK economy will lag behind other G20 nations, with spending dropping behind the curve as consumers prepare for a year-long recession and the UK continues to experience a severe Brexit hangover. Although Germany is also set to have a tough year ahead, only Russia is set to contract more sharply than the UK. The UK economy is heavily reliant on consumer spending, and although confidence has staged a fragile recovery, households are fearful of what lies ahead and are set to continue to tighten the purse strings as inflationary pressures continue. Tax rises aimed at restoring financial stability, and a rise in energy bills next spring, will eat further into consumer sentiment. We are likely to see more job uncertainty and insecurity for households, with unemployment forecast to rise over the year.
Michael Taylor, economist at Redburn: The UK has already entered recession in 2022 while the eurozone and US will both fall into recession in 2023. Overall, the UK economy is likely to contract in the year as a whole by around 1 per cent, underperforming most of its peers, most of whom will stagnate or even also contract slightly.
Suren Thiru, economics director at ICAEW: The outlook is exceptionally bleak, with the UK facing a toxic mix of recession and soaring inflation. High inflation and tighter monetary and fiscal policy are likely to continue to squeeze incomes, keeping the UK economy underwater throughout this year. Indeed, it’s probable that quarterly GDP growth will be negative throughout 2023. It will feel pretty awful for many households because living standards are likely to nosedive as inflation outstrips wages, tax thresholds are frozen and the effects of aggressively raising interest rates are fully felt. We also may see a renewed wage squeeze as the myriad of cost pressures facing businesses and rising unemployment weigh on pay settlements, particularly damaging poorer households. The UK will probably lag other developed economies because structural challenges such as Brexit are making it harder to deal with these headwinds compared to its peers by exacerbating trade frictions and staff shortages.
Phil Thornton, director at Clarity Economics: The British economy will likely lag most of its developed peers in 2023 and will fall into recession. One reason is a continued fall in real household income. Real wage growth in 2022 fell at the fastest rate for some 50 years and, thanks to high inflation and Brexit, will continue to cause severe pain for households next year.
Anna Titareva, European economist at UBS: We forecast UK GDP to contract 0.5 per cent in 2023 compared to a moderate expansion of 0.2 per cent in the eurozone. Hence, we expect the UK to underperform the eurozone.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics: The UK economy will experience the deepest recession among advanced economies in 2023, due to the unparalleled intensity of fiscal and monetary tightening and the underlying weakness of trend growth. We look for a 2 per cent peak-to-trough fall in GDP, which would result in a 1.5 per cent year-over-year decline in 2023, and expect a recovery to commence only in Q1 2024.
Kitty Ussher, chief economist at the Institute of Directors: Neither. The UK economy will perform in the middle of the European pack in 2023, as it is broadly subject to the same pressures. However, it will lag the US where the inflationary peak has come a little sooner, leading to higher consumer confidence and so greater household spending on the other side of the Atlantic.
Keith Wade, chief economist at Schroders: Like much of the developed world the UK will be in recession in 2023. There is little reason to expect UK outperformance given the scale of its inflation problem and poor prospects for trade growth post-Brexit. Households will have to contend with higher unemployment whilst concerns over the cost of living will continue.
Sushil Wadhwani, chief investment officer at PGIM Wadhwani: The UK is likely to underperform most G7 economies. We appear to have an unenviable cocktail of factors: a) the adverse effects of Brexit on labour supply, prices and trade; b) the rise in inactivity amongst the over-50s, perhaps worsened by NHS waiting lists and the lack of adequate spending on either long Covid or mental health (this area requires further research, and some of the rises are puzzling); c) an energy price shock that is worse than in some other places (eg the US); d) interest rates that are likely to rise by more than the BoE appears to think; and e) investment spending deterred by uncertainty, which is likely to be worsened by inflation likely to remain higher than the consensus expects.
Ross Walker, chief UK economist at NatWest Markets: Lag. Expensive-headline inflation will fall in 2023 but will remain significantly above target (CPI to end 2023 at about 5 per cent).
Martin Weale, professor of economics at King’s College London: I expect it to lag behind. Households will feel a very sharp squeeze.
Simon Wells, chief European economist at HSBC: The UK is likely to underperform the eurozone through 2023. The UK economy probably entered recession earlier and is likely to contract for slightly longer. Partly this reflects higher inflation and slightly tighter monetary policy, as well as the expected scaling back of energy support. Households that rent or need to refix their mortgage in 2023 will clearly suffer a greater reduction in real disposable income, as will low-income households, for whom a higher proportion of spending is on food and energy.
Matt Whittaker, chief executive of Pro Bono Economics: The cumulative effect of the global financial crisis, Brexit, the pandemic and now the cost of living pressures mean that, even by recent remarkable standards, 2023 looks like being an especially difficult year for living standards. While coming down from its 40-year high, inflation is set to remain elevated. The labour market, which has outperformed expectations for much of the last decade, is showing clear signs of softening. And rising interest rates will increasingly feed into a growing debt repayment burden for many households used to the era of cheap credit. The squeeze on households will be made worse still by the increasing pressure coming to bear on already strained public services.
And the charity sector — so often the one which picks up the slack during difficult times — is facing a perfect storm of its own, with demand for help rising just as capacity is constrained by falling donations. Half of all charities expect demand at the start of the year to outstrip their ability to cope. While the current crisis is a broad-based one, it will inevitably be those with the most limited resources who are again most exposed to what comes next. Lower-income households have the least scope for cutting back further on expenditure, while they are also among those most likely to have used credit as a means of getting by. Recent government policy shifts have provided some support for this group, but the outlook remains nonetheless difficult, and further targeted support may be needed over the course of the year.
Michael Wickens, professor of economics at York and Cardiff universities: Keep pace with other developed countries.
Trevor Williams, visiting professor at the University of Derby: Lag — and UK households will be one of the hardest hits. The UK has low productivity and, therefore, low pay. Real pay — nominal pay adjusted for consumer price inflation — will decline and energy and food prices are some of the highest in Europe.
Evan Wohlmann, senior credit officer at Moody’s Investors Service: We expect the UK economy to contract by 0.3 per cent in 2023, a worse performance than most other G20 advanced economies, as higher prices and tighter monetary policy will hurt consumer spending, investment and wider economic sentiment. Despite significant fiscal support, households will continue to see an erosion of their purchasing power as inflation, aided by higher administration costs post-Brexit, remains above target for a prolonged period. The UK’s shorter-dated mortgage market compared to the likes of Germany and the Netherlands will expose a significant share of UK households to rising mortgage rates. That said, while oil and gas make up around 80 per cent of the UK’s energy mix, the risk of energy rationing is marginally lower compared to Germany and Italy whose economies; under the weight of this uncertainty, we expect will contract in real terms by more than the UK over the coming year.
Linda Yueh, fellow in economics at St Edmund Hall, University of Oxford and adjunct professor of economics at London Business School: The UK is a more open economy, so it is more affected by global energy prices that have affected household disposable income. This cost of living crisis could mean that the UK lags behind other developed economies. But fiscal policy can cushion this impact, so the UK need not fare worse than other economies. For households, inflation plus some rising unemployment will make the year feel recessionary.
Azad Zangana, senior European economist & strategist at Schroders: The UK economy will probably be in recession through the winter of 2022-23 and start to see growth again by the second half of 2023. The eurozone should see a slightly faster recovery, but the US will likely be in recession at that point. Overall, though, it will be a difficult year for households as inflation is likely to remain elevated throughout the year.
Monetary policy: How tough will the Bank of England need to be in 2023 to curb inflation?
Silvia Ardagna: We are expecting the BoE to increase Bank rate to 4.25 per cent.
Kate Barker: Depends on whether we see any relief from energy prices. If no relief, then the BoE will need to be clear that Bank rate is not going to be reduced for some time — but may not need to push the peak up from where it has signalled. Crucially the recent upward shift in inflation expectations needs to be reversed.
Nicholas Barr: The pandemic has led to a significant shake-out of the labour market, with good arguments that in some sectors it has led to increased labour productivity. To the extent that that is so, higher productivity should call forth higher pay. If, instead, economic policy treats wage increases as inflationary and hence tightens monetary policy, the effect will be contractionary. More generally, macroeconomic policy that takes insufficient account of changes in the labour market risks making things worse.
Ray Barrell: Inflation generally reacts slowly to interest rate rises, and more may need to be done. We should expect rates to be at least 1 percentage point higher in six months. More may be needed, but that depends on the war in Ukraine.
Charlie Bean: Rates will probably need to rise further but, perhaps more significantly, they will probably need to stay elevated for some while, reflecting the internally generated persistence in inflation.
Martin Beck: We think the BoE will pause rate rises in early 2023, with Bank rate peaking at no more than 4 per cent. By that point, it should be becoming apparent that the threat of high and rising inflation is receding. The surge in energy and commodity prices in early 2021 will drop out of the annual inflation comparison and falls in the price of raw materials and shipping costs in recent months and the effect of weaker global demand will feed through into consumer prices.
David Bell: The BoE’s resolve seemed to weaken somewhat at the December meeting, with two members voting to hold at 3 per cent. Peak rates are likely in the range of 4-4.25 per cent. Absent further supply shocks, this will be sufficient, perhaps more than sufficient, to curb inflation.
Aveek Bhattacharya: With the economy facing recession, and some promising signs that inflation has peaked, there are grounds for optimism that the BoE will not need to raise interest rates much further, if at all, in the year ahead.
Danny Blanchflower: It will have to cut rates as inflation falls fast and bankruptcies rise along with labour market slack. Disastrous groupthink at the BoE is a major issue. Lack of diversity must be addressed — members all live in London and seem to not understand the rest of the country.
Philip Booth: The BoE has probably done about enough to reverse the rise in inflation and bring it down over a two-year period. Interest rates may have to continue to rise a little and they will not return to previously low levels when inflation falls.
Andrew Brigden: The extent to which interest rates will need to rise will depend largely on the magnitude of so-called second-round effects, as the first-round effects (reflecting upward pressure on global prices as the major economies began to reopen, and more recently the shock to energy prices) begin to fade. We already see evidence of second-round effects in the UK data: wage inflation is responding to consumer price inflation in a way that is inconsistent with meeting the 2 per cent target, and core inflation is responding to rises in non-core components of inflation in a way that it has not done for some time. Our central scenario sees second-round effects begin to dissipate through next year, as the economy slows further, and monetary policy continues to tighten effect. In that scenario, we see Bank rate peaking at just over 5 per cent in the second half of next year. But we give 30 per cent weight to a risk scenario that sees second-round effects intensify, and the wage-price spiral that is already in train, escalate. This could see Bank rate go much higher before inflation is brought back under control.
George Buckley: We see the Bank raising rates by a further 75 basis points in Q1 2023 to a peak of 4.25 per cent, which we think — being held there for a year — will be sufficient to ultimately bring inflation back to target, though not until the very end of 2024. We see rates being cut by 75bp to 3.5 per cent during the summer of 2024 in response to slowing inflation.
Robin Carey: The BoE must provide a balanced approach to support the people of our country. Keeping up with interest rate rises, paying mortgages and paying off loans are all concerns facing the population. The Bank’s response to such financial discomfort needs to be family focused, with an understanding of the difficulties people across the country are facing.
Jagjit Chadha: Base effects will lead to a rapid fall in inflation from the middle of next year. That is very much baked in, save a further escalation in energy prices or a fall in sterling. The BoE will have to be consistent in signalling a wish to bring inflation down to levels consistent with price stability but there is no need to jump in rapid steps to something much higher than 4 per cent. A gradual move with some leeway to move up or down the terminal level ought to bring inflation down in 2024 to something like 2 per cent, without leading to an unnecessarily large fall in demand.
Victoria Clarke: We believe that most members of the BoE’s Monetary Policy Committee will start 2023 still with a tightening bias, faced with a backdrop of very elevated inflation and with a sense of concern that the tight jobs market could fuel further, persistent, domestically-generated inflation. But the degree of tightening enacted so far will lead the BoE to become more nervous about pressing on too much further with rate increases. We do not expect the BoE to proclaim the end of the tightening cycle, but rather to pause with Bank rate at around 4 per cent after Q1. We expect this pause to be slowly extended through 2023. We do not anticipate cuts in Bank rate this year, with the BoE likely to judge that holding this restrictive policy stance is necessary to slowly reduce more stubborn services inflation, amidst the likelihood that the tight UK workforce generates strong pay growth, whilst productivity growth remains lacklustre. We expect cuts to Bank rate only in 2024. However, even then the MPC may wish to keep Bank rate on the tight side of neutral. The drop in the UK labour force participation rate has not started to reverse in the UK as it has in many of the UK’s peers.
David Cobham: With luck, it will ease off quite soon, as it should do.
Anonymous: Although inflation has perhaps already peaked, and the UK inflation has been historically relatively variable, it is possible that there will be some unexpected persistence. With financial vulnerabilities and fiscal imbalances, the BoE will be in a difficult spot, but it will have to show determination.
Diane Coyle: It’s harder than many expect to squeeze inflation down from over 10 per cent to 2 per cent, especially given the weak supply side of the economy.
Bronwyn Curtis: Having been slow to raise rates, they are now at risk of tightening too much. Energy prices have already fallen and supply logjams are loosening so inflationary pressures have already eased. More importantly, gilt yields have risen significantly across the whole interest rate curve, making it much more expensive for companies to raise capital. That lowers potential output and will dampen inflation further. I see inflation falls more and more quickly than the bank is currently forecasting.
Paul Dales: Tougher than most expect. I think the Bank will continue to raise interest rates in the early part of the year, to a peak of 4.5 per cent, even as inflation is falling. It will then need to keep rates at that level all year to ensure that inflation falls all the way to the 2 per cent target in 2024.
Richard Davies: The answer here depends on your perspective. I think 2023 will be a case of holding steady for the BoE. Those with a short-run view might interpret this as “tough”. Those with a longer-term view know that in truth the rates we see are still low by historical standards. This means one of the major challenges is communicating what the Bank is doing: the recent hikes seem extraordinary, but in a long-run macro perspective — which is important in times like this — they are not. The optimistic scenario is that the Bank will hold (more or less) steady, inflation begins to fall and we get inflation down and growth returning with more gradual changes to Bank rate in the near future.
Howard Davies: They will need to tighten a little more. How much more will depend on how far wages rise, and unemployment falls. I expect a further 100 bps over the year.
Panicos Demetriades: As I explained above, the BoE faces greater challenges than other major central banks, in light of the question marks over the UK’s macroeconomic management, as well as the experiment in “Trussonomics”, which brought the Bank’s own credibility under question. To put it in macroeconomic terms, inflation expectations in the UK, are, in my opinion, less anchored to the 2 per cent target than they are in the eurozone, where the credibility of monetary policymakers remains relatively intact. This, by itself, means that the BoE will require a bigger increase in interest rates than the ECB to bring inflation down. Already, the Bank’s base rate is one full percentage point higher than the ECB’s — I find it hard not to describe this as another “Brexit dividend”.
Colin Ellis: I don’t think the BoE will need to be as tough as the Fed has already been here. Prospects are pretty good for inflation falling relatively sharply during 2023, if not all the way back to the 2 per cent target. But I expect headline inflation to decline swiftly this year — and then a bit of a slow grind to get it back down all the way towards 2 per cent.
Martin Ellison: High inflation will mechanically fall out of the figures as 2023 progresses, which will ease pressure on the BoE to raise interest rates. Whether the Bank responds by holding its nerve remains to be seen — the risk is now that they don’t relax monetary policy in time.
Noble Francis: The BoE does not need to be substantially tougher to constrain CPI inflation given that it is likely to have peaked. Inflation will slow significantly from spring 2023, if only due to base effects, as it is a year on from the spikes in energy, oil and commodity prices after Russia’s invasion of Ukraine. The Bank’s base rate is likely to peak at 4 per cent early in 2023.
Marina Della Giusta: Inflation in the UK will probably not benefit from further restrictive monetary policy.
Anonymous: They will not be tough enough.
Andrew Goodwin: I think the BoE has already done enough, but I expect it to do more. There’s very little evidence to back their fears of an unsustainable pick-up in wage growth, and weaker activity should cause labour market conditions to loosen by lowering demand. I suspect the BoE will eventually come around to this way of thinking, but not until it has increased Bank rate to at least 4 per cent.
Paul De Grauwe: Provided no new negative shocks occur in energy prices and supplies, inflation should abate significantly in 2023 making it possible for the BoE to relax its monetary policy stance.
Oliver de Groot: The possibility that above-target inflation (and inflation expectations) becomes embedded in the UK is a major risk facing the BoE in 2023. Allowing inflation expectations to become unanchored will be more costly for economic activity in the long run than the short-run costs of curbing inflation. As such, the Bank will need to be tough on inflation. Nevertheless, it faces delicate decision-making in setting policy correctly.
Anonymous: It will be difficult, especially if the UK economy experiences another supply-side shock from energy markets. Getting rates and holding them above 4 per cent will be difficult for the economy.
Brian Hilliard: Not very. Bank rate to peak at 4.5 per cent with risk of less.
Jessica Hinds: Headline inflation is highly likely to come down next year as the past large rises in energy and food prices are unlikely to be repeated. But the Bank will need to be tough to dampen core inflation, especially the services component. Fitch expects the BoE to raise rates to 4.75 per cent by May 2023 and does not anticipate any pivot to cuts until 2024.
Paul Hollingsworth: The BoE will have to look through falling headline inflation next year and focus on likely still-strong underlying inflationary pressures. As a result, we expect it to continue to increase interest rates even as economic activity deteriorates. We assume a peak in Bank rate of 4.25 per cent in Q1, but regardless of the precise level, the key thing for us is that the bar to reverse course is very high — don’t look to central banks to come to the rescue even as the recession takes hold.
Ethan Ilzetzki: I expect inflation will be more entrenched, and the BoE will need to raise interest rates to a greater extent than the Bank and markets currently anticipate.
Dhaval Joshi: Monetary policy works with a lag of around 6 to 12 months, so it will only be in 2023 that we feel the full impact of the monster tightening in interest rates that have already happened. In that sense, the BoE will not need to hike rates much more in 2023.
DeAnne Julius: It will need to raise Bank rate to the point where it is above the 2-year forward rate in the markets — ie, into positive real territory.
Stephen King: Tougher than it thinks . . . it has tended to be too complacent so far. Inflation has proved to be a far bigger challenge than the Bank ever imagined and it may still be behind the curve.
Lena Komileva: Recessionary dynamics are destroying supply faster than opening slack in labour markets. Consumption is on a declining trend, but nominal spending is high. Inflation remains excessive, news is encouraging, but still inconsistent with the inflation target. The policy rate is still at a discount to nominal spending and central bank messaging is connecting with markets with mixed success. The Bank will have to fight inflation for longer than markets and policy officials currently expect.
Barret Kupelian: We expect that the Bank will keep rates at around the 4 per cent to 4.25 per cent mark for the foreseeable future. The reason why I don’t expect an immediate loosening of monetary policy is because of the unique supply-side issues the UK economy is facing, some of which are likely to persist for a longer period of time with a knock-on impact on inflation.
Anna Leach: Having wrongly believed that pandemic-related inflation in supply chains would come off quickly, the Bank has focused on using a lot of words to demonstrate its commitment to the inflation target. Despite the level and persistence of UK inflation relative to other countries, the Bank has nonetheless lagged others in driving up interest rates at pace. Given that a large proportion of UK inflation is domestically-driven, it would suggest the BoE has more work to do to drive down inflation. But the sharpness of the decline in real incomes will do a lot of the work to drive down demand over the next year, meaning interest rate rises may be less needed. Prudence suggests the Bank should err on the side of caution, given its past policy errors. All being well, a terminal rate of 4 per cent in the first half of the year should be sufficient to bring inflation down sustainably to target.
Warwick Lightfoot: The UK, in common with other advanced economies, has an inflation challenge that needs to be dealt with by an active programme of disinflation that will involve positive real interest rates. Moreover, leaving aside policy questions relating to price stability, once inflation is lowered it needs to return to normal monetary conditions with positive real short-term interest rates of around 2.5 per cent at the short end of the yield curve, in order to return to money and capital markets that function properly without distortion and the malign effects of the scramble for yield.
John Llewellyn: Quite tough, because the legitimate issue of relative pay (nurses) has become intertwined with the issue of absolute pay (train drivers). So now everyone is paying the price for that failure of governance.
Gerard Lyons: The BoE may not need to be too tough as inflation has peaked, the economy is slowing, monetary policy tightening over the last year is still feeding through, and further quantitative tightening has already been announced. Because central banks globally — including the BoE — were too complacent two years ago, wrongly believing inflation would be transitory when it was clear at the time that it would persist, there is a danger that they may be too aggressive now and tighten too much. Although the question relates to the cycle, the broader issue is a more structural one: the need for the economy to adjust to the end of cheap money. Since 2008, monetary policy has become the shock absorber for the economy, with low policy rates and excessive quantitative easing, contributing to asset price inflation, to markets not pricing properly for risk, leading to an inefficient allocation of capital and allowing the recent bout of inflation to take hold.
Stephen Machin: Since inflation looks like it will be coming down as some of the big base effects drop out the index then (in the absence of further big shocks) it will not have to be as tough as it recently has been in the coming year.
Chris Martin: I suspect that inflation will peak at a lower level than expected but will persist for longer than in comparable countries. The BoE will likely continue to steer an uncomfortable path in order to suppress demand enough to suppress inflation while trying not to further damage an already weak economy.
David Meenagh: With the decrease in commodity prices and a lack of demand inflation is likely to fall in 2023, so the Bank shouldn’t need to increase interest rates much higher than they already are.
Costas Milas: I expect the BoE to raise its policy rate up to 4 per cent. With CPI inflation expected to slowly retreat in 2023, there is a good chance the BoE will cut its policy rate before the end of 2023. Notice, however, that since mid-2016, the real interest rate has been negative which, of course, creates economic and financial distortions (including excessive risk taking). I, therefore, expect that the BoE will be keen, once inflation retreats and approaches the 2 per cent target, to keep its policy rate slightly above CPI inflation.
Stephen Millard: The MPC need to continue raising rates into 2023 if they are to curb inflation. I expect rates to reach 4.75 per cent by the time of their meeting in June.
Andrew Mountford: Tougher than it needs to be. Professor [Daron] Acemoglu at Massachusetts Institute of Technology — one of the most influential academic economists — argues that the contrasting levels of productivity and wealth between countries stem from the difference in institutional quality (cf “Why Nations Fail”, Princeton University Press, 2012). One thing that institutions need to do is to maintain control over inflation because inflation reduces the quality of information conveyed by prices which is necessary for allocative efficiency. Most of the current rise in the price level is not inflation. The rise in the price of energy is conveying the important information that energy is in short supply and so we should pay more and use less of it in equilibrium. What high-quality institutions should do is make sure that this rise in price level does not turn into general inflation via a wage-price spiral. The economy’s institutional framework together should make sure that firms aren’t expected to fully compensate wage earners for their reduced standard of living, thereby reducing their need to increase prices.
This could be achieved by providing households with a sufficient one-off energy payment to mitigate their loss of real income whilst maintaining the role of prices in reducing demand. This would reduce the need for wage increases and then further price increases. Unfortunately, the UK institutional framework has not managed to do this and so, compared to other developed economies, is experiencing higher inflation, and I believe greater industrial unrest. The BoE is stuck in the middle of this and feels forced to control the inflation process by increasing the costs of investment and other borrowings to firms so that they can’t afford to agree to wage increases. This is a sort of economic chemotherapy which should only be used as a last resort. Damping down inflation and industrial unrest by providing effective one-off energy cost relief would be a much less damaging course of action. It is not too late. Longer-run inflationary expectations are still not high — two and four years ahead are below 4 per cent.
John Muellbauer: Given the lower capacity of the economy, demand will need to fall sufficiently. Since the Bank’s model of the economy is hopeless, it will have to feel its way by trial and error and probably be slow to respond. This suggests that policy will be somewhat tougher for longer than currently expected. But much depends on global factors and especially Russia’s war.
Gulnur Muradoglu: Very tough.
Andrew J Oswald: Very. I was a young economist in the 1970s and remember the wage-push inflation, as we called it then, that was caused by workers all trying to keep up with others’ pay rises. Humans haven’t changed since then. They care deeply about wage comparisons. High price inflation is to be expected as wage costs go up throughout the economy.
David Page: We forecast the BoE to raise the policy rate by another 75bp in 2023 to a peak of 4.25 per cent. At this level of policy restrictiveness, we expect to see the recession continue into 2023 and a notable easing in a tight labour market. However, we also believe that with the BoE already mindful of the medium-term impact of its policy tightening, it will be the first developed economy central bank to cut rates, expecting the first cut in Q4 2023, once the BoE sees the forecast easing in the labour market begin to emerge and aware that the policy tightening it has enacted will continue to operate with a lag before the full effect is felt.
Alpesh Paleja: We expect a little more monetary tightening over the next few months, with interest rates peaking at around 4 per cent early next year. But beyond this, the MPC are likely to pause on rate hikes as signs of an economic downturn become more apparent, and global price pressures continue to fade. But the outlook for inflation is particularly uncertain at the moment, with risks in both directions. If unforeseen events lead to an intensification of global price pressures, or inflation remains entrenched in domestic price and wage setting, the Bank will need to be much tougher to bring inflation down.
John Philpott: Not as tough as currently expected. Bank rate will probably rise to around 4 per cent early in 2023 but as the severity of the recession becomes clear and deflationary pressures intensify, the BoE will switch back to rate-cutting mode.
Kallum Pickering: Monetary policy is already sufficiently tight to return inflation to the BoE’s 2 per cent target by the end of 2023. A further tightening, which seems likely at the February meeting, risks overdoing it. Abstracting from the external sources of high inflation, chiefly the global energy supply shock following the Russian invasion of Ukraine, the present pace of underlying inflation in the UK is in the 3-4 per cent range. Yes, that is a problem. However, the BoE already tightened a lot in 2022 via Bank rate hikes and via its now fairly aggressive unwinding of quantitative easing. As monetary policy works with a lag, and since there is now clear evidence of a) recession and b) that headline inflation has peaked, further hikes on a risk-management basis would be misguided. Every additional hike going forward merely increases the chance the BoE undershoots its target in late 2023 and is forced to sharply reverse towards easier monetary policy.
Christopher Pissarides: I don’t think it should be very tough, definitely not 1980s-style, because of the negative impact on the real economy.
Ian Plenderleith: Not too much more: interest rates to peak at around 4.5-5 per cent, as transitory inflationary pressures subside.
Jonathan Portes: Inflation will fall back quite rapidly over the year and the Bank may not need to raise interest rates much further, perhaps no higher than 4 per cent.
Richard Portes: Not very tough. The housing market will be depressed, despite foolish government attempts to stimulate demand. Unless the war drives energy prices up again, they will fall, and many other goods will be in excess supply. And the recession will deepen. So inflation will fall significantly without further tightening. I fear the Bank may go too far.
Vicky Pryce: Given the slowdown in the economy caused by higher input costs to business, steep hikes in energy and food costs to households and the deflationary and recessionary impact of higher taxes and tighter fiscal policy, the BoE needs to do very little more. In any case, raising short-term interest rates has little impact on inflation caused mainly by forces outside its control. But what needs to be watched is the extent of QT that is about to take place. Whatever one may think about the distortionary effects of quantitative easing, I fail to see how the economy would have recovered and long-term yields stayed so low without the massive BoE QE intervention during Covid and beyond. We are now seeing continuing, though diminishing, year-on-year borrowing by the Treasury which is no longer supported by quantitative easing and that is pushing yields up anyway, not just because of the Truss/Kwarteng “mini” Budget turbulence.
Thomas Pugh: Inflation is now on its way down after peaking at 11.1 per cent in October. Fuel prices should drop by more than 5 per cent over the next few months due to the reduction in crude prices and a stronger pound. Global food prices have also started to fall, which should reduce food price inflation soon. Admittedly, energy prices will rise by 20 per cent in April but that is a much smaller rise than the 54 per cent increase last April. What’s more, shipping costs have almost fallen back to their pre-pandemic level. All that means that inflation should fall from 10.7 per cent in November to a little under 4 per cent by the end of next year and be back at 2 per cent in early 2024.
However, there is a risk that inflation proves stickier than we think, either because a tight labour market means that wage growth falls more slowly than we expect, or because firms are rebuilding margins. Indeed, the Q4 edition of the RSM UK Middle Market Business Index showed that middle-market firms are getting better at passing on costs. We doubt that the MPC will end its tightening cycle until there is clear evidence of the labour market loosening and wage growth coming down. We don’t think that will be until Q2 next year. As a result, we expect another 50 bps of interest rate hikes in February and a 25 bps rise in both March and May to take interest rates to 4.5 per cent.
Sonali Punhani: Our view is that the BoE is underestimating the persistence and strength of domestic inflation and the tightness of the labour market. We expect wage pressures to continue to rise in the near term and remain elevated. Even though labour demand is weakening, labour shortages are likely to limit the rise in unemployment as we expect the fall in participation rates driven by long-term sickness to be persistent.
Near-term inflation is likely to have peaked, but we expect inflation to fall only slowly in the next few months and stay above the target in 2023 due to the stickiness of services inflation. So we expect the Bank to continue to raise rates in the first half of 2023 to 4.5 per cent by May 2023. Given we expect above-target inflation to persist, we don’t forecast any rate cuts in 2023, despite a recession.
However, we see a risk that the BoE remains dovish as it has over the past few months and hikes rates slower than we expect, which could risk inflation being higher for longer, further sterling weakness and eventually a
more prolonged hiking cycle and higher terminal rates.
Morten O. Ravn: Inflationary pressures so far continue to be significant in the UK despite commodity price inflation coming down. Labour market conflicts also signal that there is little confidence in the UK’s ability to bring inflation under control. In combination, the Bank will, unfortunately, need to continue its tough stance for longer than otherwise warranted.
John Van Reenen: The declining economy will do a lot of the work, but there will have to be some more hikes.
Ricardo Reis: Quite tough. The forward rate says a peak at 5.2 per cent, which may well be right, but probably more risk on the upside than the downside.
Anonymous: Moderately, inflation will come down.
Matthew Ryan: It may be tougher for the MPC to rein in inflation than it is perhaps willing to accept. UK rate hikes may need to continue deeper into the first half of 2023 than the MPC is currently signalling.
Jumana Saleheen: Three things will define how tough the BoE will need to be in 2023: good luck, good policy and good communications. I want to start with good communications because I think the Bank can improve the quality of its communications. It could start by holding a press conference following every MPC meeting, just like the ECB and Federal Reserve do. In addition, the Bank needs to find ways to be clearer in signalling the path of future policy — the current (historic) format of leaving the wider public guessing between constant rates and the interest rate path implied by financial markets is not working. The Bank will need to get lucky with the shocks that hit the economy. It will also need to set good policy — in other words, interest rates that are neither too hot nor too cold, but just right.
Our expectation is that the BoE will have to raise interest rates by another 100bp next year. We expect interest rates to rise from the current level of 3.5 per cent to a terminal interest rate of 4.5 per cent by spring 2023. This compares to our view of a US terminal rate of 5 per cent to 5.25 per cent.
Michael Saunders: After a slow start, the MPC has now done most of the monetary policy tightening that will be needed to return inflation to target. Some further tightening may well be needed, perhaps to around 4 per cent. Given the likelihood that services inflation and pay growth will be sticky, the MPC are unlikely to ease quickly unless the economy weakens very sharply indeed.
Yael Selfin: With inflation on course to reach the BoE’s target by spring 2024, there is a risk the Bank will act too strongly. Two further modest rate rises of 25 bps each at the start of 2023, with base rates peaking at 4 per cent, may be sufficient to see inflation gradually falling back to target. The Bank could adopt a wait-and-see posture during the rest of 2023 and act in the event inflationary pressures increase.
Andrew Sentance: In my view, UK interest rates will need to rise to at least 4-5 per cent to get on top of current inflationary pressures. We have already moved a long way from near-zero interest rates to 3.5 per cent. But if inflation remains more stubborn then we cannot rule out Bank rate rising to 6-7 per cent for a while.
Philip Shaw: All developed economy central banks have been tough in 2022 — that has been a defining feature of the year, especially during the past six months. Given that the stance of UK monetary policy is probably already somewhat restrictive, it is not clear that rates have too much further to rise. One wild card is that the transmission mechanism of monetary policy has shifted over the past few years. Over 80 per cent of the UK mortgage stock is now fixed rather than floating, which means that the impact of higher policy rates is staggered and in this sense, it is worth noting that 4mn mortgagors are due to refix over the next year, mostly at much higher rates. This means that there will probably be a further hit to consumer spending in 2023 as the lagged impact from higher policy rates finally bites. Overall we suspect that the peak in the Bank rate will be limited to 4 per cent. It is quite feasible that the MPC begins to bring rates down towards the end of 2023 to prevent an unnecessarily deep downturn, at least if a sustained surge in pay increases is avoided.
Andrew Simms: Simply turning an interest rate screw will only increase the UK’s economic pain without tackling the underlying inflationary pressures, over a problem that will most likely, short of another war or pandemic, sort itself out in the coming year. The BoE has already conceded that inflation is set to fall in 2023, so for that reason alone, further raising interest rates would make no sense. But there are many other reasons for them not to increase the cost of money in a way which will increase unemployment, homelessness and bankruptcies. Chief among these, again acknowledged by the Bank, is that most of the key inflationary drivers are things beyond their control. The fallout from Putin’s war against Ukraine looms large and is also perversely a key reason why inflation will fall later in 2023, as current prices start to be compared to the prices already inflated by the war in 2022. International energy cost and supply chain causes of inflation from the war add to labour supply and product chain blockages resulting from Brexit and the aftermath of the pandemic.
More important for the UK’s long-term recovery is that the Bank should ensure low-cost money is available to fund a rapid transition to create a zero-carbon, high-employment and -wellbeing, energy-efficient, low-waste, circular economy. That implies boosting a greater re-domestication of how the UK meets its needs whether in terms of manufacturing, food or renewable energy production.
Nina Skero: We are anticipating two more 50bp hikes, which would bring the Bank rate to a peak of 4.5 per cent by spring 2023. We then anticipate a cut to 4.25 per cent in October 2023 with further cuts to follow in mid-2024. To some extent how far the Bank will have to go depends on how far people expect it to go. If there is an expectation that interest rates will rise significantly, households and businesses may choose to cut back on discretionary spending in anticipation of higher mortgage/debt payments. This would in turn help bring inflation under control, lessening the need for interest rate hikes.
James Smith (RF): The good news here is that we seem to be past peak global inflationary pressures and international drivers of inflation could even move into reverse: energy prices have been falling; global goods demand has eased; and supply chain problems are easing around the world (including in China, finally). But what really matters for the BoE is the extent of domestic inflationary pressures, and here the news is more mixed. While households’, firms’ and financial market measures of inflation expectation have been falling, labour-market quantities have loosened only slightly (with vacancies falling and short-term unemployment rising) and nominal wage growth remains unsustainably high. All this means that the BoE is likely to continue to tighten monetary policy in 2023, even if not to anything like the same degree as was the case in 2022. But with major global central banks all acting to reduce the risk of a lasting global inflation overshoot, there is a clear risk that global financial conditions could tighten too much and we could see a sharp reversal in policy in 2023.
James Smith (ING): The BoE is nearing the end of its tightening cycle. Inflation has peaked, particularly if you focus on “core goods”, where plenty of categories have the potential for declines in price levels (not just inflation rates) over the coming months. That’s linked to higher inventory levels and faltering consumer demand. At the same time, there are growing concerns about the impact of rate-sensitive areas on the economy as rate hikes continue. Central banks, not just in the UK, are realising there are growing costs attached to “fighting the Fed” and the associated dollar strength we saw earlier in 2022. Fortunately, the market reaction to the Fed’s mini-pivot in December takes a bit of the pressure off the BoE to keep moving as aggressively. As with the entire economic outlook, the jobs market is the main uncertainty, and scope for ongoing labour shortages suggest core services inflation could take time to come down. That doesn’t necessarily require the Bank to take rates much higher than they are now, but it could argue in favour of holding Bank rate at these elevated for longer before cutting. At ING we expect Bank rate to peak at 4 per cent in Q1 but, unlike in the US, we aren’t forecasting rate cuts before 2024.
Andrew Smithers: Inflation is likely to slow on current policies, which include continued QT.
Alfie Stirling: The Bank doesn’t need to raise interest rates much further, if at all, in order to deliver their 2 per cent inflation target over the medium term. There is already a risk that rates have risen too far, too fast and that the coming recession has been at least partly made in Britain.
Susannah Streeter: Supersized rate hikes now appear to be in the rear-view mirror, as data filtering through indicates that the rate of price growth is slowing. But although inflation may have reached the peak, that doesn’t necessarily mean it’s a smooth downward path from here. There is still the potential for plenty of pain ahead as stubbornly high prices continue to cause severe headaches for the economy. In the UK, the yield curve currently suggests further rate rises through the first half of 2023 to around 4.5 per cent before the BoE presses pause and holds the rate steady through to the end of the year. The significant price inflation in services and wage growth in the private sector are both red flagged as risks and, although the economy is weakening with a contraction of 0.1 per cent expected for the last quarter of the year, it’s more resilient than had been expected. Nevertheless, the recession rolling in will dampen domestic demand and so, although inflation is set to stay elevated through the first half of 2023, it seems reasonable to expect, as forecast by the BoE, that it will gradually fall back in line with the 2 per cent target over the course of the next couple of years. It may prove more stubborn though, given many of the inflationary pressures have been external, and energy prices are likely to stay unpredictable.
Michael Taylor: Bank rate will peak at no more than 4 per cent. In addition to the lagged effect of 2022’s rate hikes by the MPC the jump in interest rate expectations during the shortlived Truss administration further tightened policy with immediate effects, notably on the housing market. Mervyn King [former BoE governor] dubbed this the “Maradona effect”, where changes in rate expectations mean policy rates don’t have to.
Suren Thiru: A painful deceleration in inflation is on the way as favourable base effects, slowing demand and falling commodity prices bring down the headline rate, but at the cost of a protracted recession and notably higher unemployment. We expect inflation to average around 6.3 per cent for 2023, lower than last year but still high by historic standards. This monetary tightening cycle is likely to end by the summer and as recession risks crystallise, policymakers may be forced to pivot from aggressively hiking rates to loosening policy by the end of 2023 to lift the UK out of a damaging downturn.
Phil Thornton: The Bank has already been tough and needs to stop raising Bank rate when it gets to 4 per cent — if not before. The danger is now more that it will tighten policy more than is needed and depress economic growth even further than is needed to hit the 2 per cent target than it fails to counter inflationary pressures that are receding.
Anna Titareva: Following the 50bp hike in December, we expect another two hikes in 2023 — 50bp in February and 25bp in March, bringing Bank rate to 4.25 per cent.
Samuel Tombs: The MPC probably has done enough already to bring CPI inflation back to the 2 per cent target within the next two years. Surveys now show that businesses are responding to the weakness of demand and the jump in their debt servicing costs by laying off staff. The MPC, however, likely will err on the side of caution, given the rise in inflation expectations in 2022. As a result, we expect it to raise Bank rate to 4 per cent in February, and then keep it at this very restrictive level for the rest of 2023.
Kitty Ussher: Most of the hard work on interest rates has already been done. The Bank’s own models now indicate that inflation is likely to return to its medium-term target without much further action. The problem the Bank has is now one of perception, which may lead it to over-tighten. Because of the time lag between raising rates and the full impact on the real economy, combined with the mathematics of base effects working their way through, it will not be until the second quarter of 2023 that businesses and households fully believe that inflation is falling. In the gap between now and then, the Bank may feel under pressure to keep taking action, running the risk of inflation undershooting its target in 2024 and an unnecessarily harsh recession.
Keith Wade: Much tougher than they have been so far. Past experience shows that a significant downturn in activity is needed to bring inflation down from these levels. Supply-side factors such as Brexit and the pandemic have made the task more difficult as the required slowdown in demand is now greater than before. Unfortunately, the Bank has yet to grasp the nettle, has moved too slowly and is allowing second-round effects on inflation to develop.
Sushil Wadhwani: The BoE’s forecasts are puzzling. Their own DMP survey displays forecasts for wage and price inflation that appear to be too high to be consistent with their forecasts. The BoE’s stance that current market forecasts for interest rates are probably higher than what the economy needs is likely to be challenged.
Ross Walker: There is already a substantial amount of policy tightening in the pipeline (ie, announced Bank rate hikes which have yet to feed through to mortgage debt-servicing costs), so we expect only modest Bank rate rises (to a 4.25 per cent peak). The MPC’s “guidance” around whether ‘forceful’ action is required — and what, exactly, constitutes that — risks becoming incoherent.
Martin Weale: I expect Bank rate will go to between 4.5 per cent and 5 per cent.
Simon Wells: Although inflation has probably peaked, we don’t expect it to fall within 1 percentage point of the BoE’s target before end-2024. Wage pressures and global supply-side headwinds could keep core inflationary pressure elevated for some time. History shows it is rare for inflation to fall from double digits to under 3 per cent in less than three years. But with the BoE forecasting higher unemployment, and tighter monetary policy set to bear down on demand, policy rates could be approaching the peak. One more 25bp rate rise in Q1 next year may be all we get before a pause, although the market is pricing in considerably more than that.
Michael Wickens: It is still in catch-up mode so it will continue to raise rates for the first part of 2023. Inflation is then projected to fall and the US will stop rate increases, which will allow the Bank to stop too.
Trevor Williams: Rates will hit a peak of 3.75 per cent to 4 per cent. Quantitative easing will do the rest of the job of tightening monetary policy.
Evan Wohlmann: Very. The BoE will likely further raise its policy rate in 2023, and we expect the rate to peak at 4.5 per cent. Monetary policy will remain tight throughout the year given high upside risks to inflation even as we expect headline price growth to start to ease. While a wage-price spiral is unlikely, domestic pressures — including high core and services inflation and strong underlying pay growth — may not be consistent with a rapid return to the 2 per cent target. Like most central banks, the BoE will be mindful of the risks from a premature loosening of financial conditions, particularly as we expect a heightened sensitivity in financial markets to UK policy decisions will continue for some time.
Linda Yueh: The BoE has been fairly robust in its rate rises in 2022, so 2023 should see it ease the pace while it seeks the “neutral” rate in order to balance controlling inflation expectations with a recessionary economy.
Azad Zangana: About half of the UK’s inflation is temporary and caused by external factors such as energy prices, but the other half, which is still very high, is caused by demand in the economy being too strong relative to supply. Too much money chasing too few goods. The BoE would have to be very tough to bring inflation all the way back to target in 2023, raising rates to 6 or 7 per cent. But this risks causing a crash in the housing market, and even triggering another banking crisis. So the Bank is more likely to allow inflation to fall more gradually, minimising the risk to financial stability.
Fiscal policy: Will the government need to announce further tax raises in 2023 to maintain sound public finances?
Kate Barker: Uncertain. Most likely not as the present fiscal policy leaves some room for disappointment.
Nicholas Barr: Yes — in the face of 12 years of underinvesting in public services combined with rising political pressures to fix things, higher taxes are necessary, desirable and inevitable. My worry is not that taxes will rise, but that their burden will fall more on low and middle incomes than I would choose.
Ray Barrell: Tax increases will eventually be needed to finance sensible public sector wage increases. The public finances are probably sound and debt markets are stable. The government has signalled it is willing to deal with deficits appropriately. There is no rush to raise taxes when growth is slow, but it must be done soon. We can only hope that the neoliberal right of the Tory party has learnt lessons from the failure of Trussonomics.
Charlie Bean: It will need to raise taxes in the medium term, as the implied squeeze in real public spending that is presently assumed in the Office for Budget Responsibility forecasts is, in my view, unsustainable. But the government does not need to actually raise taxes in the near term. All that is really required is a credible plan to put the public finances on to a sustainable (declining debt-GDP ratio) trajectory in the medium term. The Sunak/Hunt combination seems to have largely undone the damage caused by the irresponsible Truss/Kwarteng “mini” Budget and that should afford them a bit more “wriggle room” in managing the public finances.
Martin Beck: We think the economy will perform less weakly than the OBR expects, which should translate into a lower level of public sector borrowing during 2023 than the OBR has forecast. This and the risk that lifting the tax burden to an even higher level could undermine the economy’s capacity to grow means the government needn’t and shouldn’t think about further tax rises.
David Bell: The government will strive to avoid further tax rises. Hiking taxes in the year before an election would reduce even further the chances of re-election. Some shifts from capital to current spending or a gentle increase in borrowing are the more likely outcomes.
Aveek Bhattacharya: Market fears seem to have eased since the turmoil of the autumn, and as the year progresses it seems likely that limiting the damage of the impending recession will be a greater priority than raising taxes — quite aside from the political challenges of passing further tax rises just now.
Danny Blanchflower: No, as the economy will slow fast and they will likely have to raise spending sharply.
Philip Booth: As all the fiscal sustainability reports show and as some of us have been saying for 25 years, the demographics are such that it will be very difficult to balance the fiscal books. There will need to be tax rises or spending squeezes over the next few years, but there is a limit to the extent to which taxes can, and should, rise.
Andrew Brigden: UK fiscal policy is finely balanced, as Kwasi Kwarteng’s ill-fated “fiscal event” of 23 September made clear. Our central scenario assumes that no further fiscal tightening will be required, but that depends crucially on the outlook for long-term real rates of interest, which have risen globally since the beginning of this year, and by some 250 basis points in the UK. For now, financing costs faced by the UK government remain a little below the UK’s trend rate of growth, and in that world a country can run a primary deficit indefinitely. But the gap between the two is much closer than it has been for some time. If UK long-term real rates of interest move above the UK’s trend rate of growth, which we see as around 0.75 per cent, then a tightening of fiscal policy may be needed urgently.
George Buckley: No.
Robin Carey: In such a turbulent economic landscape, the current government will need to ensure that the tax burden is fairly shouldered by the wealthier parts of the population. In particular, the government will need to focus on ensuring that large corporations overseas are paying tax for income generated in the UK and prevent tax avoidance through offshore funds.
Jagjit Chadha: Given national preferences for a better health and social care system, a need to build infrastructure and an increase in debt service costs, there is a need to raise taxes in line with total managed expenditure. The earlier this is done, the more we will be protected against any further negative income shocks.
Victoria Clarke: The outlook for UK public finances is still much more uncertain than normal amidst the scope for large moves in energy prices and in annual changes in inflation, economic growth and interest rates. In addition, spending policy decisions could further shift the fiscal outlook. This is important since the degree of fiscal ‘headroom’ is small, so the government remains vulnerable to the possibility that even small changes in forecast assumptions could leave the government with more fiscal repair work to do to show debt-to-GDP on a decisive downward trajectory. However, we suspect that HM Treasury will avoid further tax changes in 2023. If there is more fiscal work to be done, the government may favour building this into spending reductions, rather than tax cuts, but in a heavily backloaded way again.
David Cobham: That depends on whether the government gets real about the pay of nurses and other public sector workers: if it does, it may need to increase some taxes. If it does not get real, it will be deliberately worsening the UK’s meagre public services as well as impoverishing public sector workers and weakening consumer demand, which will lower the economy’s taxable capacity and reinforce the UK’s current status as a failing state.
Anonymous: Having moved abroad, I have lost track of the different waves of fiscal announcements. In the 1970s, inflation created a distributional conflict between the unions and the employers. Today the distributional conflict impacts the budget, potentially impacting both the spending and the revenue side of the budget. Electoral considerations may well lead to some relevant adjustment (see eg NHS), involving higher taxation.
Diane Coyle: Yes. And to maintain minimally acceptable public services.
Bronwyn Curtis: No government wants to raise taxes coming up to a general election, so I think it is unlikely that they will do anything even if public finances deteriorate a bit.
Paul Dales: I suspect the government has done enough to achieve its self-imposed fiscal rules. That said, if it finds itself having to increase public sector pay by more (which seems likely given the strikes) then taxes may need to be raised to cover the cost.
Richard Davies: I don’t expect this, no. A lot of work was done in the autumn and I expect HMG to want to stick to that path.
Howard Davies: As the election approaches the strategy set out in November will come under strain. How credible is it to push off real cuts in public spending until after the election? But I do not think the government could implement further tax increases even if they wanted to.
Panicos Demetriades: This cannot be ruled out as there remains considerable uncertainty around the global outlook, while the UK’s fiscal stance remains vulnerable to market sentiment which can push borrowing costs higher. Once again, these risks emanate, in part, from remaining question marks over the competence of the UK’s economic policy management, notwithstanding Sunak’s better record than his predecessors.
Colin Ellis: Hopefully not! Barring negative shocks, the UK government seems to have shored up market sentiment after Kwarteng’s horrendous policy blunder (that is the polite version of what I call it). Somewhat ironically, I think the inflation we are living through right now will make life a bit easier for the government, overall, in terms of the public finances.
Martin Ellison: The bond market vigilantes taught the government in September 2022 that sound public finances are essential. It’s likely that the government will eventually cave into public sector wage demands, in which case tax rises are inevitable.
Noble Francis: The new chancellor’s reversal of the “mini” Budget policies and the Autumn Statement policy changes, combined with the OBR analysis of policy impacts, are likely to be sufficient to maintain public finances and the credibility of the financial markets. Furthermore, they should allow for a small degree of government stimulus in 2023 with an election due within two years.
Marina Della Giusta: Not likely.
Anonymous: No.
Andrew Goodwin: Given there’s so much uncertainty around the supply side and how much of the weakness identified by the OBR will prove permanent, it would be a mistake to tighten fiscal policy even more than is already planned. Regime change and the switch to a more orthodox approach have restored market confidence and there’s no need to go any further.
Paul De Grauwe: It would be a great mistake to increase taxes further when the UK economy is likely to experience a recession in 2023. This would only aggravate the recession without positive effects on the budget. But the fact that this would be a mistake does not prevent it from happening.
Oliver de Groot: No, the government does not need further tax rises in 2023 to maintain sound public finances. However, the government needs to ensure that any fiscal support measures (whether existing or new) are better targeted.
Brian Hilliard: It should but is unlikely to. If it were to raise taxes further it would feel obliged to cut spending further. The cuts it has already announced are not convincing and even deeper ones would be even less so.
Paul Hollingsworth: Our GDP forecast for 2023 (minus 0.9 per cent) is somewhat less pessimistic than the OBR when it comes to the depth of the recession. On that basis, it’s not obvious that the chancellor will be forced to announce significant further tax increases in the March Budget. That said, pressures on the public finances are likely to remain in the medium term, not least because we think the OBR is likely overly optimistic about the strength of the underlying recovery over the next five years as a whole.
Ethan Ilzetzki: There is no need for further tax rises to maintain sound public finances. The current HMT plan is sufficient.
Dhaval Joshi: Depends on the depth and length of the recession.
DeAnne Julius: No, I expect tax revenues to come in higher than the OBR forecasts as long as gilt yields remain at current levels or below, so there should not be a need to raise taxes in 2023 to meet the government’s fiscal rules.
Stephen King: The risk to the government’s fiscal plans is an inability to hold the line on public sector pay. If there’s a big overshoot, there may have to be fiscal tightening elsewhere.
Lena Komileva: Higher than expected inflation and nominal growth will provide a cover for the deep structural adjustment to fiscal spending that likely lies beyond the next election.
Barret Kupelian: Probably not. However, this assumes that government does not offer a one-off payment to healthcare professionals and other professions linked to government pay due to the cost of living crisis.
Anna Leach: With the government having already announced significant future consolidation, the spring Budget needs to focus tight government resources on how growth will be driven in the medium term. We need detailed plans for driving green growth, particularly following the Inflation Reduction Act and given Europe is likely to take its own action to match subsidies. The priority must be to shape the tax and regulatory system to enable businesses to thrive, which in itself will deliver sound public finances.
Warwick Lightfoot: No. The government over the last year has already announced a significant discretionary increase in taxation. The fiscal challenge for the UK will be to return the ratio of public expenditure to around two-fifths of national income on average. How public expenditure is financed by taxation and borrowing is a second-order question.
John Llewellyn: It need not; but it well may.
Gerard Lyons: No. There is no need for fiscal policy to be tightened any further in 2023. The best way to maintain sound public finances in 2023 is for policy to help ensure the downturn, or recession, is as short and shallow as possible. This points to neither repeating the failed years of austerity or further tax increases. The tax take, already high, is set to rise further, with the income tax system not being indexed to take account of inflation. Also, the rate of corporation tax is set to rise from 19 per cent to 25 per cent. Previously when this rate fell, the tax base widened. Now, this higher rate will apply across a wider base, hitting business competitiveness, especially when included with the UK’s unattractive investment incentives.
The high ratio of debt to GDP leaves the government’s finances vulnerable to either a deterioration in the growth outlook or to higher borrowing costs. Although the ratio of debt to GDP will rise this year and possibly next, its future trajectory should be downward as growth recovers in future years and rates stabilise. This negates the need to tighten fiscal policy further. It is important to avoid procyclical policy where weak growth exacerbates worries about the deficit and prompts further fiscal policy tightening.
Stephen Machin: Yes, but at the moment whether and how the government would do so seem highly uncertain.
Chris Martin: They should, but I doubt that they will. Even if they wanted to, I expect fractures within the Conservative party to prevent action on this.
David Meenagh: The government shouldn’t be raising taxes, as this will produce a worse recession. The government should be borrowing to increase spending, and then paying it back when the economy recovers. Our research has shown that using countercyclical fiscal policy in tandem with monetary policy can stabilise the economy.
Costas Milas: I hope not. Looks more likely to me that the government will do additional borrowing. This is because Sunak and Hunt have calmed down markets so they can afford to do so. It will help, of course, if credit rating agencies “cancel” their earlier announcement of placing Britain’s credit score into “negative watch”.
Stephen Millard: Given the falls in real income for households over the coming year, I can’t imagine that the government will announce any further tax raises. If the fiscal position worsens by more than is already expected, then they may announce tax rises for 2024 or beyond or they may change their ‘fiscal target’ to improve the fiscal position.
Andrew Mountford: Yes, but the difficulty of raising taxes in a recession is that you are asking people to pay out more in taxes at a time when they may be short of money or liquidity. Potentially, therefore, via credit multipliers, this may deepen the recession. This is why a tax on wealth that is only paid when the assets are sold (ie not necessarily during the recession) but which nonetheless immediately adds to the government’s balance sheet (as a share of an asset) is the obvious thing to do. In the UK this would be most practically achieved by taxing the value of land. Land cannot be moved to evade taxation and the ONS estimates the value of land and assets-over-land to be significantly more than £5tn compared to a GDP of a little more than £2tn. Thus, an annual 1 per cent tax would be worth about 2.5 per cent of GDP and so could back a substantial annual flow of public spending backed by additions to the stock of public owned assets which can be realised later. There is a long list of potentially productive public spending projects on, for example, energy, health, training, education, transport and IT provision.
I say this every year and I reiterate again this year because 1) it remains true, 2) it is especially relevant given the worsening government balance sheet, 3) as an academic economist I feel I should emphasise issues where economic theory is able to make strong recommendations and 4) because I found it interesting to learn from reading UC Berkeley’s Professor [Brad] Delong’s Slouching Towards Utopia (Basic Books, 2022, p. 181), that a similar tax was proposed by Joseph Schumpeter to deal with Austria’s post-first world war fiscal problems, and wanted to share this with those who have scrolled down this far!
John Muellbauer: The government needs to expand the tax base, mostly obviously for property taxes, but lacks the courage to do so. It will try to muddle through.
Gulnur Muradoglu: Probably not, due to election pressure.
Andrew J Oswald: Probably.
David Page: Probably. The OBR calculates that the chancellor has only around £15bn in headroom to meet his new fiscal rules — a historically small margin. On top of that, the OBR’s economic forecasts look somewhat optimistic over the medium term (admittedly beyond next year) and this may also impact the calculations. It is likely that additional fiscal tightening will be required across 2023, and probable that some of that will be delivered in the form of tax increases (as opposed to further spending cuts).
John Philpott: The recession will hit the public finances by more than expected. The government is now in a bind, which makes it difficult to keep the public finances in check without further depressing the economy. I would announce neither further tax rises nor spending cuts on the assumption that in the context of mounting economic weakness a temporary additional rise in public borrowing will be considered justifiable by the financial markets.
Kallum Pickering: No. The medium-term UK fiscal position is not worse than the average major economy and is largely sustainable. The fiscal consolidation announced in the Autumn Statement on November 17 was only necessary to shore up credibility after Truss and Kwarteng’s misguided fiscal plan in late September. Now that confidence has returned to UK markets, fiscal decisions should depend upon near-term economic developments — especially inflation and the shape of the recession.
Christopher Pissarides: No. It should wait until the resolution of more uncertainties, such as the war in Ukraine, economic relations with China as it comes out of lockdown, and then decide on the basis of more accurate forecasts of the future path of public finances.
Ian Plenderleith: No, so long as it can maintain confidence in sensible fiscal management.
Jonathan Portes: No. There is no need to raise taxes in the short term, especially given the likely sharp slowing in the economy. Over the medium to longer term, the UK needs structurally higher tax revenues. As the current crisis, not just in the NHS but in social care, crime and justice, and education, shows, these are needed to deliver decent quality public services in the face of demographic pressures. However, this would be best achieved by radical tax reform, and it is vanishingly unlikely that this government will undertake any such thing.
Richard Portes: No — though it may say it must. Absent the “moron premium”, the UK can issue without any major strain. And we should.
Vicky Pryce: The government will be raising a considerable amount of extra revenues through its stealth taxes in 2023. In any case, it will not need to tighten much further as its own fiscal rules are in no way constraining. The only worry will be a market reaction to the UK needing to continue to borrow year after year through the OBR’s forecast period while the BoE also engages in QT, flooding the market with bonds that it tries to remove from its balance sheet. But markets may worry even more if the prospects for the UK economy are reduced even further by extra tax increases unless they are targeted to say tackling the non-doms or more “windfall”-type taxes.
Thomas Pugh: Not in 2023, but it is likely to have to raise taxes further ahead. The OBR estimated the trend rate of growth at 1.75 per cent, which seems optimistic given the impact of Brexit and the probably permanent drop in the workforce. If trend growth were closer to 1.5 per cent, it would mean the economy was about 1 per cent smaller in the medium term and would easily be enough to wipe the £9bn headroom against the fiscal target that the OBR factored in. Throw in higher pay demands and increases in budgets and it seems very likely that taxes will rise again over the next five years.
Sonali Punhani: I don’t think so. After the government’s reversal of more than half of the “mini” Budget’s unfunded tax cuts, the appointment of a fiscally credible prime minister and chancellor, as well as its announcement of a credible fiscal plan, risk premia on UK gilts and sterling assets seems to have subsided. It does look like markets judged the path for the fiscal policy set out in the Autumn Statement to be credible. Now public finances could deteriorate in 2023 if the downturn is worse than expected or energy prices shoot up, but given we are likely to be in a recession and close to an election year, I suspect the bias would be towards more fiscal loosening rather than tax rises.
Morten O. Ravn: Hopefully not. If the recovery gets under way in 2023, further tax rises should be avoidable, but there will be very difficult choices to be made between tax rises and further spending reductions.
John Van Reenen: Probably — higher than planned spending is almost inevitable. But I suspect given the election coming, they will try to quietly put it on the deficit.
Ricardo Reis: No. It might, but it does not have to.
Anonymous: Yes.
Matthew Ryan: Hard to call, but I suspect more perhaps on the way though the government intend to extend energy support beyond April.
Jumana Saleheen: The Autumn Statement reversed most of the measures announced in the “mini” Budget. It allowed the government to pursue mild easing in the coming two fiscal years. It also announced fiscal measures that put UK debt to GDP on a downward trajectory by the end of the OBR’s five-year forecast period. At present these changes are sufficient to signal sound public finances (without further tax rises in 2023). That said, should the macro environment turn out to be worse than expected, the government may need to consider tax rises in 2024 and beyond.
Michael Saunders: The government’s stated plans — if they stick to them — will probably be enough to restore public finances to a sustainable trend even with low potential growth. The problem is that it is unlikely this government or its successor will want to stick to the stated plans, especially the large and ill-judged cuts to public investment. Assuming a more realistic path for public spending, some further tax rises would be needed eventually. But the better solution would be for the government to get serious about tackling the UK’s low potential growth. Until that is addressed, the UK will be stuck with a rising tax burden and/or meagre growth in public spending.
Yael Selfin: The government decided to postpone the majority of the measures required to consolidate public finances until the next parliament. While it is unlikely to meet the fiscal rules it set up in November, it may not need to act fast, especially as it may be counterproductive to increase the tax burden during a recession.
Andrew Sentance: I don’t think we need more tax rises in the UK. That isn’t the right response when the economy is moving into recession. Public finances need to “take the strain” when the economy is facing difficult times. The time for repairing the damage to public finances is when the economy is recovering — which will not be until 2024-25.
Philip Shaw: No. The politics of the current situation suggests that the chancellor only gets one shot at tightening fiscal policy and the action taken at the Autumn Statement is likely to be it until the election. One might feel that the UK is a little unlucky in the sense that a relatively high proportion of the national debt consists of index-linked gilts and that RPI inflation is rampant — alongside energy related support, higher debt servicing costs have been a primary contributor towards the increase in forecasts of the deficit over the past year. However, we would have to point out that is not a one-way street as the low-interest rate and inflation environment generally in prior years has tended to helped Britain’s public finances in the past.
Andrew Simms: It has already been argued compellingly that the so-called black hole in public finances currently being used to justify a second wave of austerity is a dangerous politically motivated fiction, and the result of a statistical artefact of accounting, rather than an economic reality. The gap emerges from the difference between unreliable forecasts and self-selected government targets of permissible debt-to-GDP. Yet, such targets often change. One piece of recent analysis demonstrates that simply reverting to the underlying measure of debt used to set the target to that used by the government until January 2022, not only makes the black hole disappear, but credits an extra £14bn to spend. Further taxing the useful, productive economy would be counterproductive. Rather we should be seeing tax incentives to propel a more rapid transition to a dynamic green economy. This would not only encourage the kind of genuinely sustainable economic activity needed to shore up public finances, but insulate the economy better from being undermined by external energy price and supply shocks.
That said, for the UK to make the transition to a modern, zero-carbon, high-wellbeing economy, the adage of “tax less what you want more of, and more what you want less of” should be applied. Windfall taxes on the super profits of fossil fuel energy companies could go directly to make Britain’s leaky homes more comfortable and energy efficient. MPs on the all party parliamentary group on the Green New Deal recently called for the level of taxation on oil and gas firms to be permanently raised to 70 per cent.
Nina Skero: Given the extent of tax rises and threshold freezes already announced, it is hard to see the tax burden increasing even further in 2023. If fiscal tweaks need to be made, ideally they would be done on the expenditure side, in particular via efficiency savings. However, we have seen over and over again that this is much easier said than done.
James Smith (RF): Significant tax rises will come into effect in April, reducing typical household incomes by around £1,000. These will land disproportionately on middle-income households: families in the middle-income quintile will see their incomes fall by 2.3 per cent as a result of tax rises, whereas the top 5 per cent will only see their incomes fall by 2.0 per cent. On top of that, government borrowing increases may not be as bad as feared given the falls in the yield curve since the Autumn Statement. This, plus political opposition to further tax rises, means that we’re unlikely to see further large-scale tax increases in the spring Budget. On top of that, if — as seems likely — inflation falls sharply and the labour market loosens as the recession builds, it is likely that measures to support the economy will be needed, rather than tightening fiscal policy through further tax rises.
James Smith (ING): The chancellor will no doubt be hoping that a calmer market interest rate environment and the lower debt-interest forecasts that should entail can allow him to water down some of his longer-term spending cut plans — many of which could prove challenging to implement. But while debt-interest estimates should come down, and our GDP forecasts (at the margin) are a little more optimistic than the OBR’s for next year, the official forecaster’s medium-term growth forecasts look too optimistic. In practice that’s going to keep the pressure on the government to look at tax rises, whether that’s next year or in subsequent ones. In the shorter-term, there’s a fair chance that the cost of protecting household energy bills will rise once again next year. Our house view is that wholesale natural gas prices will rise again in 2023 as Europe finds it harder to refill inventories ahead of next winter.
Andrew Smithers: Probably not.
Alfie Stirling: The government will almost certainly need to announce further spending in 2023, in response to both the short-term pressure from the recession and long-term pressure on public services. It is likely that further tax increases will be needed alongside this.
Susannah Streeter: By reversing fiscal easing and raising taxes instead, Jeremy Hunt has steadied the ship through the turbulent waters of a cost of living crisis, sailing away from the market mayhem which erupted following the Trussonomics “mini” Budget. Spiking gilt yields retreated, and the pound has stabilised even though spending cuts were pushed into the budgetary long grass. With the absence of fresh bond market tantrums, fresh tax clawbacks should not be needed. Instead, support for struggling sectors should be prioritised over the coming year. The aim should be to ensure that sustained growth returns sooner rather than later, given that an expanding economy has greater potential to buoy government coffers over the longer term, rather than more salami slicing on incomes which will limit consumers’ appetite to spend.
Michael Taylor: There will be no need for further tax rises in 2023; the public finances are on a satisfactory long-term path and higher taxes would be inappropriate for a weak economy.
Suren Thiru: The chancellor is likely to remain constrained by recession and the accumulation of debt, which saw him compound the economic misery facing the country by cutting back on public investment over the next five years. The government remains short of money and with the looming recession likely to further weaken government revenue, the potential for further tax rises in the spring Budget should not be discounted.
Phil Thornton: No. It has already enacted steep taxes and heralded cuts in spending that risk a repeat of the damaging austerity programme of 2010. These will depress growth and affect the poorest households the most. The government is probably prevented from allowing borrowing to rise to cater for greater public spending (as it did during Covid-19) because of the echoes of the disastrous economic programme of Liz Truss that undermined the confidence of the financial markets in the current administration.
Anna Titareva: That’s not currently in our baseline.
Samuel Tombs: The fall in expectations for interest rates and gilt yields since the Autumn Statement suggests that debt interest spending in 2023-24 will be about £10bn lower than anticipated by the OBR. At the very least, this should ensure that the chancellor does not need to announce further major tax rises in the Budget in March. Even so, the fiscal consolidation will be intense; the OBR forecast in the Autumn Statement that the cyclically-adjusted primary deficit, as a share of GDP, will decline by 2.5 percentage points in 2023-24, the most since 1981-82, excluding pandemic-distorted years.
Kitty Ussher: No. The government has backloaded the fiscal consolidation sufficiently that the stock of debt to GDP will be projected to fall in the medium term in a way that broadly keeps the market content. They will also have some wriggle room if, as seems likely, interest rates do not rise as much as expected in the OBR forecast, reducing debt servicing costs.
Keith Wade: This is a risk as government finances are under pressure everywhere as a result of higher rates and the end of QE. The UK will need to maintain a credible fiscal stance in this environment. However, recent falls in oil and gas prices may be helpful for the UK in reducing the cost of the energy price guarantee.
Sushil Wadhwani: No comment.
Ross Walker: Not in 2023 but probably after the (2024) election.
Equally, official fiscal projections are less orthodox than the political rhetoric might suggest so there is probably only very limited leeway for pre-election giveaways. We expect gilt yields to rise significantly in 2023 (10 years to a peak of about 4.25 per cent) as the market must digest substantial issuance.
Martin Weale: With an election in sight, I think this is rather unlikely.
Simon Wells: Pressures on the public finances will remain intense, and we see no improvement in the fiscal deficit. There are a number of policies implicit in the OBR’s forecast, which sees the deficit shrinking, that may not be realistic. For example, there is no new money for public services despite the recent spate of strike action putting pressure on the government to lift wages. And it is unclear exactly how the government plans to help businesses with energy costs once the current support ends in April 2023. Of course, revenues might surprise to the upside. But on our current forecasts, it will be another year of heavy borrowing. For now, though, the government seems to have done enough to reassure the market after the late-September/early-October turbulence.
Matt Whittaker: Further tax rises may well be required in 2023, but not as a down payment on government borrowing or national debt but rather in order to prop up public services capacity and potentially provide more targeted financial support for households. The terms of trade shock the UK has faced means that pain is inevitable; the choice is how we share we the burden across the country. Achieving the right balance between tax rises and different forms of spending increases is of course political, and it may be that we therefore don’t see further rises in 2023. But almost certainly we should.
Michael Wickens: No. The debt-to-GDP ratio would have fallen even without the latest overkill “mini” Budget due to highly negative real debt service interest rates and a positive primary surplus. Just do the maths!
Trevor Williams: No — it may have gone too far in raising taxes.
Evan Wohlmann: The government’s 2022 Autumn Statement sets out an ambitious 5-year fiscal consolidation which in our view is a step towards demonstrating the UK’s commitment to fiscal prudence. That said, the government has little headroom to meet its debt-reduction target amid very high uncertainty around the economic outlook and strong social and political pressures to further raise government spending. At the same time, the domestic political environment is likely to become more polarised over the coming election cycle which may complicate efforts to deliver on the spending cuts and tax rises outlined in the fiscal strategy. As a result, we expect UK government debt will remain consistently above 100 per cent of GDP over the coming years.
Linda Yueh: This is hugely uncertain and depends on the continuing cost of living crisis and global energy prices as well as the scale of the recession. If further income support for households and firms is needed, then the government would likely need to consider more tax increases to put in place in the years after the recession ends.
Azad Zangana: No. We believe that when the OBR took the market-derived profile for BoE rates, it inherently became too pessimistic. The BoE has already stated that it will not raise interest rates that high. By the March Budget, the OBR’s forecast should become more optimistic on growth and inflation, raising the forecast for tax receipts, and proving the government some room to manoeuvre.
Reasons to be cheerful: Will we see green shoots of recovery starting by the end of 2023?
Silvia Ardagna: Unemployment increase will be very modest.
Kate Barker: Exports may pick up as the global economy starts to come to terms with the energy shock and, who knows, business investment may rise as capital stock needs to be replaced and labour has become relatively more costly.
Nicholas Barr: If any, small, few and fragile.
Ray Barrell: In 2023, we are likely to see slightly disturbed earth rather than green shoots. Output will probably stop falling in the second half of 2023 and may even rise quarter on quarter at the end of the year.
Charlie Bean: Only if your crystal ball is made of green glass . ..
Martin Beck: Falling inflation during the course of next year, and the support to real incomes this will offer, should enable the economy to return to growth in the second half of next year. With other countries also benefiting from global disinflationary pressures, the UK will also gain from a pick-up in activity in other economies.
David Bell: Recovery is unlikely. The source of any revival in demand is unclear. Consumer demand will be suppressed due to falling real incomes; investment, already weakened by increased uncertainty, will come under further pressure as public sector capital spending enters a long period of decline; a trade-based recovery is dependent on improved prospects in overseas markets and smoothing of the relationship with our main trading partners.
Aveek Bhattacharya: Barring some dramatic geopolitical turnround, eg a substantial fall in energy prices, things do not seem likely to look better this time next year. The “green shoots” might just look like things no longer getting worse.
Danny Blanchflower: Seems plausible if the government and the MPC U-turn. If not, then the recession will be deeper and longer lasting than the five-quarter-long Great Recession. Sadly, this is worse than the Great Recession, which is precedent. The MPC still hasn’t worked out that a 1 percentage point rise in unemployment lowers wellbeing much more than a 1 percentage point rise in inflation. Only grounds for optimism is whether economic policies from 2022 are put into reverse as the economy collapses and living standards fall. The concern is that strikes turn into broader social unrest. No green shoots anywhere.
Philip Booth: Yes, there is unlikely to be another energy price shock and the BoE has taken some action in relation to inflation. The government could help a lot if it liberalised house building.
Andrew Brigden: We see UK GDP bottoming out around the final quarter of next year. We are doubtful that green shoots will be in abundance at that time, but 2024 should at least feel better than 2023, which contrasts with the even bleaker picture painted by the BoE.
George Buckley: Across Europe, the survey evidence has been less pessimistic than we had thought it might have been. Conditions remain weak, but perhaps not as weak as first thought, and there’s signs that we might even be passing the worst. Note the rise in the composite purchasing managers’ index survey and improving, albeit from very low levels, consumer confidence across Europe. We expect our forecast recession to moderate in the second half of 2023, so yes, we expect green shoots to be showing through by then.
Robin Carey: We will need to enforce change in order to reboot the UK economy in the coming years. We must invest in British industry, and in new technologies that will provide opportunities for well-paid jobs to support our communities. I’d be keen to see more from the “levelling up” agenda, to open up strong and vibrant economies across the UK that will ultimately help us thrive as a nation.
Jagjit Chadha: Bank rate may not have to rise as high as the market currently expects to bring inflation on to a path to price stability. As the year progresses, we may also start to see labour market participation increase as savings deplete and the threats from Covid recede. Both of these events may create some further fiscal room.
Victoria Clarke: The economy is contracting, but the jobs market has so far been resilient. Indeed, the tight UK workforce reduces the risk that a fall in economic activity fuels further economic weakness, as firms appear more likely to retain workers than lay them off. Inflation is likely to be relatively slow to fall in the UK, but it does appear to have passed its peak. Indeed, supply chain issues have eased, global shipping costs have fallen sharply and goods price inflation is now declining. We should slowly see more of this as 2023 progresses. With pay growth holding up relatively well, we should see an end to the household real income squeeze in the second half of 2023.
David Cobham: Maybe by comparison with the pandemic period, but not by comparison with the period before Brexit or, even more, the period before the global financial crisis.
Anonymous: A diffuse opinion is that the “inflation tsunami” that started in 2021 may end in 2023. In principle, this may be good news. However, the general slowdown in inflation is likely to coincide with a return to a period of low demand and reduced activity, after the post-Covid temporary hike in consumption is over, given that the pre-Covid macro trends are basically unchanged, if not worsened. Another issue is that, given the hike in price level, some adjustment in wages will be necessary, if anything, to sustain demand, determining the distribution of the cost of higher energy prices in Europe. Fiscal and monetary policy will have to be smart to accommodate this adjustment without erring on either side of the equation — too much, too little demand.
Diane Coyle: No, not unless some sanity returns to our trade relations with the EU.
Bronwyn Curtis: Yes. I am optimistic that alternatives to Russian gas will accelerate and energy savings will become more institutionalised in Europe. Those who left the labour market during Covid will start returning as incomes are hurt by inflation, and boredom sets in.
Paul Dales: Yes. The recession will probably be over before the end of the year, inflation will be well on the way back to the 2 per cent target and interest rate cuts from the BoE will be on the horizon. 2024 will be much better than 2023.
Richard Davies: Again, it depends. Do the shoots we care about have deep roots, or shallow ones? I do expect inflation to come down, with many more people experiencing real wage increases, and this, via household consumption, will begin to lift the GDP again. So green shoots, in terms of our recent price shock problem, yes. But the deeper questions, and the real roots of prosperity, come from productivity rising consistently. I am less optimistic here, simply because our productivity performance has been so concerning for the past 15 years and, I fear, may require large policy interventions to solve.
Howard Davies: No. I expect a shallow recession, but a long one. Consumer spending will be supported this year by cash-rich households who built up deposits in the pandemic. But that effect will tail off. And the looming prospect of further fiscal tightening will kill off any green shoots that do appear.
Panicos Demetriades: Most forecasters predict that the worst will be over by the end of 2023, but that largely depends on the global developments in 2023. If we were to see a rapid end to the war in Ukraine, energy prices would come down and that would reduce inflationary pressures, which would feed into smaller increases in interest rates and a stronger economic recovery. If, however, there is further escalation in the war in Ukraine, the much predicted and desired shoots of recovery by the end of 2023 will not materialise. Sadly, the global economy remains in the hands of politicians who have given us little reason to be optimistic in recent years.
Colin Ellis: Inflation should be a lot lower, and hopefully confidence will have bottomed out too. I think the stage could be set for a decent bit of cyclical recovery during 2024.
Martin Ellison: I’m very pessimistic on the UK economy. Brexit has done long term damage, energy policy is poor, and the pool of talent in government is at rock bottom. That’s enough glyphosate to kill off any green shoots of recovery.
Noble Francis: The second half of 2023 is expected to see a rise in UK GDP as inflation eases. Economic recovery is likely to be slow, however, given poor consumer confidence and after a period of sustained real wage falls combined with the impacts of tax rises.
Marina Della Giusta: In creative sectors and arts possibly.
Anonymous: Only if the Ukraine war is over by September 2023.
Andrew Goodwin: Yes, on the proviso that global energy prices come down in line with futures prices and the BoE doesn’t over-tighten monetary policy. If these conditions hold then we should see the start of a recovery in real household incomes towards the end of 2023.
Paul De Grauwe: Few things are more difficult to predict than movements in the business cycle. But yes, there is a possible positive scenario. If the energy crisis is overcome, if inflation declines allowing the BoE to relax, then at the end of 2023 a recovery might be in sight, provided no further policy mistakes are made.
Oliver de Groot: The UK economy will begin to see improving economic conditions towards the end of 2023 as a result of cyclical factors. However, the UK economy really needs to see green shoots in terms of potential (trend) output and this should be the focus of government policy in 2023.
Anonymous: The second half of 2023 should be a better period for the global economy as inflation pressures subside and the Chinese economy feels the full effects of reopening.
Brian Hilliard: Probably, because the squeeze on real incomes should be easing.
Jessica Hinds: Our forecasts show the UK economy returning to growth in the back half of the year, so the worst is likely to be over. That said, the recovery looks set to be weak, reflecting tight monetary policy, still high inflation and the planned step-up in fiscal consolidation in 2024.
Paul Hollingsworth: Following what we expect will prove to be a relatively mild recession by past standards, we expect the UK economy to return to growth in the second half of 2023. However, facing the impact of synchronised monetary and fiscal policy tightening, as well as structural issues such as a scarcity of labour, we expect the recovery from this downturn to be sluggish.
Ethan Ilzetzki: It is difficult to forecast one quarter, let alone one year, ahead. Whether the economy recovers will depend on the war in Ukraine, the effects of Covid on the Chinese economy, commodity prices and other unforecastable factors.
Dhaval Joshi: Yes, the first green shoots of recovery will appear in the stock market, which tends to look at sales and profits “12 months ahead”. In that sense, I would expect the stock market to begin a sustained rally at some point in the second half of 2023.
DeAnne Julius: That depends on developments in Ukraine. If energy prices do not spike higher due to further Russian action, then inflation will fall steadily, which should enable the BoE to hold rates, rather than increase beyond 4 per cent.
Stephen King: Anything’s possible — who knows what will happen to gas prices, for example? But the bigger challenge is a deteriorating trade-off between output and inflation. So I’m not so cheerful!
Lena Komileva: The recession will not be felt equally across society and it will hurt various income brackets differently. Moreover, neither fiscal nor monetary policy will be able to aid a recovery in an environment of structurally weak growth and high inflation due to deglobalisation, climate change and weak immigration.
Barret Kupelian: Inevitably there are winners and losers in any downturn. But I suspect quite a lot of the national conversation will be explicitly and implicitly driven by the repercussions of the UK distancing itself from its largest and closest trading partner. This ultimately has to do with the fact that UK economic output is smaller than what it would have been had we remained members of the EU, with repercussions on virtually every single economic variable, including on productivity and public finances.
Anna Leach: On balance, as inflation comes down over the course of the year, household finances will stabilise, providing a better platform for demand. Other brakes on growth should also ease — supply chain frictions and costs already show signs of improvement, in part as global growth has softened this year. The amelioration of this drag on growth should feed through to companies and the wider economy gradually. Crucially, energy supply for winter 2023 needs to be addressed swiftly to ensure that an energy crunch doesn’t undermine the recovery later in the year.
Warwick Lightfoot: In the 21st century, market economies have encountered two massive shocks — the credit and banking crisis between 2007 and 2009, and the public health crisis generated by Covid. Policymakers have weathered both without the social and economic disasters that international capital suffered in the 1930s. And the scale of the fiscal and monetary response to Covid, while igniting an uncomfortable episode of inflation, has returned advanced economies to problems that, in principle, policymakers and central bankers know how to manage, rather than the glimpse of a secular stagnation and a stationary state that was beyond them. For the UK, one piece of good news is that the economic and social costs of the necessary disinflation will be lower than 30 or 40 years ago, because it now has a normally functioning labour market that accommodates shocks through price change rather than principally relying on quantitative adjustment.
John Llewellyn: Perhaps. But from a bigger, deeper pit than that of the EU.
Gerard Lyons: Yes. As inflation decelerates sharply this should allow scope for a recovery in real incomes and in consumption as the year progresses. This too should improve expectations about the policy environment in 2024. If talk of a resolution on the Northern Ireland protocol materialises, this too will help wider business sentiment.
Stephen Machin: Doubtful. The feasible time horizon even for the starting point of recovery to get out the deep problems of economic stagnation facing the UK economy, especially on real wages and productivity, would seem to be longer.
Chris Martin: For recovery, the UK economy needs to maintain growth of at least 2.5 per cent for a few years. I cannot see that happening while we remain in what is in effect a policy regime of managed decline.
David Meenagh: The economy should start to recover towards the end of the third quarter, beginning of the fourth.
Costas Milas: I am optimistic in that we might see the economy expanding from mid-2023 onwards. The reason relates to a number of economic activity predictors, not often discussed by the financial press. First, an up-to-date, for December 2022, measure of financial stress in the UK, which monitors the volatility of bond prices, stock prices and exchange rates, has declined dramatically. Second, a measure of economic policy uncertainty in the UK, based on articles published by the UK press, has also declined in December. As noted by the academic literature, both measures have predictive power for UK growth up to 20 months ahead. So things might turn out better than predicted by most forecasters.
Stephen Millard: I am expecting the UK economy to be in recovery by the end of 2023. But I do not expect this recovery to be one in which the economy grows particularly strongly. It will just stop contracting!
Andrew Mountford: Something I find frustrating in the discussion of growth in the current affairs media is the over-analysis of the latest datapoint. Will growth in the fourth quarter of 2023 be positive compared to the fourth quarter of 2022, or the third quarter of 2023? Possibly. But this really is of second- or third-order importance. What really matters is the path towards sustained long-run growth. For the reasons given in the first question — poor private investment, a sicker, less productive workforce, low public good provision, high inequality and poor industrial relations — the prospects of sustained high growth rates are not at all good.
If one needs reasons to be cheerful, then one has to look to the very long run. Brown University’s Professor [Oded] Galor, my adviser, in his book The Journey of Humanity (Penguin Random House, 2022), convincingly argues that the world is evolving towards a high human capital, high productivity growth path, where investment in education, skills and training are highly productive and highly valued. The UK has benefited a great deal from this evolution as students and high skilled workers have been attracted here. The UK is thus well placed to further gain in the future . . . if its education, skills and training sectors are provided with enough investment to maintain its position as one of the leading providers in the world.
John Muellbauer: It is exactly the green aspects of public and private investment that are lacking in the UK. While global supply constraints are likely to ease and global inflation come down, without an end to Russia’s war, it is hard to see robust green shoots in the UK [in] 2023.
Andrew J Oswald: I doubt it. There are too many cost pressures to feed through to prices, and confidence will start to be lost in the idea that buying property is a one way bet.
David Page: Yes. We do expect the recession to end and (modest) positive growth to re-emerge by year-end, not least as we forecast inflation falling materially over the course of the year and relieving some of the real income squeeze currently weighing on consumers. But we caution that with ongoing restrictive policy, both monetary and fiscal, a rebound in annual growth in 2024 is only likely to be modest.
Alpesh Paleja: Broadly, yes. We expect the economy to have emerged from recession at that point, as lower inflation alleviates the squeeze on household spending, and capital spending begins to recover. But there remains considerable uncertainty around this judgment, particularly around the pace at which inflation will fall back. Green shoots also need to be viewed in the context of the longer-term challenges facing the economy: continually weak productivity, capital spending, trade intensity and potential growth. Urgent action is needed here to boost the UK’s growth trajectory.
John Philpott: Yes, but only if both fiscal and monetary policy respond in a timely and appropriate manner to the deflationary pressures that emerge in the first half of the year.
Kallum Pickering: Yes. The UK and wider European recession is the direct consequence of the global energy supply shock triggered by the Russian invasion of Ukraine. This is not a normal business cycle downturn. As such, the normal dynamics do not apply. The combined impact of policy measures to dampen the near-term shock, especially for households, combined with longer run adjustments by businesses and consumers through the price mechanism, points to a recovery starting from late spring and onwards. The big risk next year is that an excessive tightening by the US Fed triggers a nasty US recession rather than a shallow one. A lasting hit to US performance would hurt global trade and the European recovery.
Christopher Pissarides: Unlikely, although there might be small improvements. It depends on how the labour market issues causing strikes now and shortages in some sectors will be resolved.
Ian Plenderleith: The bizarre feature of the present landscape is the combination of low growth and high employment. I don’t really understand how a high employment recession works, nor what it leads to. So I would expect we will see not a very severe or prolonged recession, but a pretty feeble recovery when it comes, probably by the end of 2023 — not green shoots, just a bit of scrubland.
Jonathan Portes: Yes, the near-term gloom may have been overdone. By the end of 2023, barring further large negative shocks, things should have stopped getting worse, and most people should be seeing rising real wages. The UK’s longer term structural economic problems remain, however, and the government does not appear to have any meaningful strategy to address them. Indeed, as regards the impacts of Brexit, it appears — as does the opposition — to prefer to pretend they do not exist.
Richard Portes: We may have an Arctic cold wave then . . . But the fall in inflation should improve consumer confidence, and surely investment has to rise some in due course despite the Brexit effect, which will persist. So provided the cold doesn’t kill the shoots, maybe.
Vicky Pryce: I see few green shoots except that inflation will drop sharply as it will do in other countries too through the year. Otherwise a combination of still-high, though falling, inflation and higher taxes will lead to substantial further falls in disposable incomes, and consumer and business confidence will remain subdued. Moreover, the poor manufacturing performance over the last couple of years, coupled with loss of trade to the EU will mean that any promises of levelling up cannot possibly be fulfilled in any meaningful way.
Thomas Pugh: One crucial point is that not all recessions are created equal. We expect a peak-to-trough fall in GDP of around 2.5 per cent. That would be slightly smaller than the early 1990s recession, but significantly less than the global financial crisis, and a fraction of the pandemic. We think it will be the fourth quarter of 2023 before the economy starts to grow again. But it will be early 2025 before the economy regains its pre-pandemic level. One eventual upside is that many unproductive companies, which have survived by rolling over cheap debt, will fail now that interest rates have risen sharply. Though this will deepen the recession next year, it will eventually allow the resources which had been hoarded by these firms to be redeployed to better uses.
Sonali Punhani: The UK economy can recover at the end of 2023 and in 2024 as inflation normalises, allowing the BoE to begin cutting rates to get closer to neutral. But we think the recovery in growth is likely to be modest, as the economy is expected to face a fiscal consolidation from 2024 onwards, along with lagged effects of monetary tightening. Moreover, UK growth should also continue to be constrained by Brexit’s impact on trade, business investment and labour shortages.
Morten O. Ravn: There are some green shoots in the latest US numbers signalling that the Federal Open Market Committee may be able to avoid continuing aggressive fed funds rate rises. One would hope that this spreads to other countries, UK included.
John Van Reenen: Yes. Hopefully the war in Ukraine will end by then.
Ricardo Reis: Yes, as energy prices may well fall. And maybe, finally, we will have some reforms that have some potential to boost growth.
Anonymous: As fuel prices come down, green shoots will emerge.
Matthew Ryan: I believe that economic activity will hold up better than anticipated globally throughout 2023. Modest growth to return in the second half of 2023, once inflation rates begin to return towards more “normal” levels.
Jumana Saleheen: We expect the UK to enter recession in the third quarter of 2022, and to last for six quarters, until the end of 2023. By the end of 2023, we do expect green shoots of recovery, at least in the forward-looking data. As with any recession, necessity is the mother of invention, and there will be winners and losers. The winners will be defined by their ideas, innovation and ultimately productivity. Another reason to be cheerful is that the long-term returns in financial markets have improved. Rising interest rates and slowing growth in 2022 gave rise to losses in almost all major asset classes. But now that we’ve been through that significant re-pricing, there are silver linings as we look ahead to long-term annualised returns for sterling investors over the next decade.
Michael Saunders: Unless energy prices fall sharply, it is unlikely the economy will provide reasons to be cheerful in 2023. My hope — I put it no stronger than that — is that the current economic weakness will prompt a much stronger and more realistic debate on the need to lift the UK’s low potential growth rate. As a country, we need to listen more to the economic advice of the experts, OECD and IMF, rather than adopt half-baked schemes, eg Liz Truss. The UK has already had a lost decade, and needs a more serious and evidence-based approach to supply-side policies if we are to avoid another lost decade.
Yael Selfin: We expect the UK economy to contract until the end of 2023, with the first quarter of growth in the first quarter of 2024. However, the fall in output in the second half of 2023 could be very mild. Unemployment is also expected to remain relatively low, protecting households’ main incomes.
Andrew Sentance: Too early to tell. Recessions are unpredictable in terms of depth and length. But I would hope so.
Philip Shaw: Probably yes. The recession is what some might term a “cyclical recession”, not a “balance sheet recession” as per the global financial crisis. With the banks in good shape, lower interest rates will help to stimulate demand when inflationary dangers have passed and the time comes to ease policy. The downside risks are that: 1) supply chains become dysfunctional again, perhaps due to the Covid situation in China; and 2) UK labour participation rates remain low, both of which would choke off supply. Either of these situations could delay a cut in interest rates as a boost to demand under these circumstances would result in higher inflation not healthier economic growth.
Andrew Simms: Recovery suggests returning to a prior state of health, but even before the war in Ukraine, before the pandemic, Brexit or even going back to before the 2007 financial crisis, the UK economy has seen its benefits distributed in a highly unequal way, consistently missed opportunities for win-win environmental upgrades, and been marked by wasteful, debt-fuelled overconsumption. So the question is not whether we can return to some prior, sick economic state, but whether we can see the green shoots of genuine transition to a more equal, wellbeing-oriented and ecologically viable economy. Here, oddly, I do see some reasons to be cheerful if we can hold on to some of the lessons from the lockdown years, as traumatic and difficult as they were, about what individuals, firms, communities and governments are capable of when circumstances call on all groups to flex their agency and full capabilities.
The greenest of shoots from living through the pandemic is that we learned we are able to transform not just the economy but our day-to-day lives almost overnight — putting public health and wellbeing before short-term economic interest. Companies converted production lines to serve a public purpose: brewers and cosmetics firms made hand gel, fashion companies made personal protective equipment and even Formula One engineers made low cost breathing aids. Local authorities redesigned town centres to favour walking and cycling over polluting private car access, and gave more space on streets to local businesses. Momentum is growing for vibrant, healthier car-free cities. Flying for business, and the cost, carbon and time it consumed, was virtually ended as we connected online instead. Most people radically altered how they lived to help others and put public safety first, with millions taking the opportunity to rethink what mattered in life and seek to escape the “work and spend” consumer trap. A shorter working week was normalised for many and there was something of a reskilling, with more people relearning how to cook, make and repair things, entertain themselves and help others through local mutual aid groups — many of which are still active. We were also reminded that, with public backing, science can move rapidly to find and implement solutions, and that the state has the capacity to enable and make things happen at scale and speed. It can, for example, end street homelessness, find resources and compel the banking system to support rather than drain the real economy — and it can even be the wage payer of last resort. The green shoots are there, but they need to be watered and not trodden on.
Nina Skero: The economic situation will get worse before it gets better, but there is light at the end of the tunnel as it seems that the recession we are probably already in won’t be particularly harsh. We are anticipating positive growth figures in the third and fourth quarter of 2023 as inflation already shows signs of easing and other downside risks also begin to fade.
James Smith (RF): Global inflationary pressures are likely to ease through 2023, and could even go into reverse. If that happens, falls in real incomes will be smaller than expected, reducing the extent to which consumers need to retrench and the BoE will raise rates. Such a scenario would mean a shorter recession and offers the prospect of a return to growth in the second half of the year. But there are many downside risks to such a scenario including an escalation of the war in Ukraine and widespread disruption from ongoing strike action.
James Smith (ING): This is first and foremost a cost of living shock, and that picture should start to look better by the end of 2023. We’re forecasting headline inflation to end 2022 at roughly 4 per cent, and wage growth is likely to stay robust, albeit less strong than it is now. Assuming the jobs market does indeed weather this recession better than some past instances, owing to the very tight starting point, then there are reasons to be hopeful that economic output should have troughed before the end of next year.
Andrew Smithers: Not on current policies.
Alfie Stirling: Absent another unforeseen supply shock, the rate of inflation is likely to fall during 2023, allowing policymakers to focus more on supporting the wider economic recovery and family finances.
Susannah Streeter: Green shoots in the UK economy will be hard to glimpse in 2023, but roots will be taking hold. As inflation dips back towards 5 per cent by the end of the year, price pain will ease for consumers and companies. Warmer weather in the spring and summer could reduce economic sensitivity to energy prices. Added to this, storage capability has improved, and Europe has managed to find alternative energy supplies incredibly quickly, highlighting a nimbleness in energy policy that could act as a protection against future energy shocks.
Tentative signs of greater co-operation with Europe, such as collaboration on offshore wind development, could show signs of acceleration as the UK government attempts to spark growth. Prospects of a deal being clinched on the NI protocol in the spring are looking up, which marks a thawing of relations and would help boost the pound. The FTSE 100 is expected to dip back as the effects of the recession take hold, as even international revenue streams won’t fully protect UK listed companies from the impact of the contraction. However, there may begin to be some respite on the stock market in the second half of the year as the price spiral dips. Added to this, consumers are looking more resilient on both sides of the Atlantic, and while output over the first half of the year will disappoint, there is a chance that growth in the latter part of 2023 could defy expectations as central banks reach peak interest rates, inflation cools off and rates start to fall. Rate rises in emerging markets happened first and have gone much higher. With signs that inflation is peaking, we see greater scope for rate cuts in the emerging world, given that the hikes in emerging markets happened first and have gone much higher. This should support outperformance by some emerging equity and bonds markets.
Michael Taylor: By late 2023 the MPC will be cutting rates from the peak of 4 per cent, possibly to 3.5 per cent by year-end. Inflation will be falling towards, if not reaching, 2 per cent and recession will have cooled the labour market. Real incomes will have stabilised. As 2023 draws to a close the economy will be emerging from recession.
Suren Thiru: The cost of living crisis could start to ease by the end of the year as inflation drops back, boosting consumer spending power. A larger than expected drop in energy costs would accelerate this improvement. The looming recession could be shorter and shallower than expected if households boost economic activity by spending more of their “unanticipated” savings accumulated during Covid lockdowns, or if the rate of precautionary savings is lower than is typical during downturns.
Phil Thornton: Hardly. The fiscal tightening will exert a large drag on the economy through 2024. Growth may return towards the end of the year but this will etiolated strands of grass rather than a lush meadow.
Anna Titareva: We expect a relatively slow recovery in the second half of 2023, with GDP growing 0 per cent quarter on quarter in the third quarter of 2023, and 0.1 per cent quarter on quarter in the fourth quarter of 2023.
Samuel Tombs: The recession should be drawing to a close as 2024 approaches, though the subsequent recovery will be sluggish, given the drawn-out nature of the shock to households’ disposable incomes from mortgage refinancing.
Kitty Ussher: Yes. By the time spring is firmly established, there will be a fillip to sentiment from heating being turned off, universal credit being uprated by CPI, and a belief that inflation has peaked, ending the need for further interest rate rises. This will improve consumer confidence, leading to greater discretionary spending, and give businesses a clear run to enact investment plans. On top of that, we will have a pragmatic technocratic government desperate to prove economic competence in the wake of the “mini” Budget car crash. Unless something dramatic changes, the second half of the year is likely to be much more positive than the first half.
Keith Wade: Green shoots are more likely in 2024 when monetary policy eases.
Sushil Wadhwani: One of the more important factors that might warrant us feeling more cheerful would be peace in Ukraine. The impact of that on commodity prices and confidence could transform the economic outlook for 2024.
Ross Walker: Maybe. Spring 2024 is perhaps more realistic, given the likely de facto ongoing monetary tightening taking effect throughout 2023, lagged Bank rate rises feeding through to higher debt-servicing costs.
Martin Weale: Perhaps.
Simon Wells: Hopefully, the recession will be shallow. The labour market is still tight, some households should still have healthy savings buffers accumulated through the pandemic and inflation is on the way down. But monetary policy works with long and variable lags. The rate rises through 2022 may only have their peak impact on economic activity from the back end of 2023. Reflecting this, we see a pretty lacklustre 2024, even if the economy should start recovering in the second half of 2023.
Matt Whittaker: The front loading of MPC activity in recent months may well mean that inflation comes down a little more rapidly than has been supposed in many projections. This will ease the burden on households, relative to expectations, and might mean that we end 2023 with some signs of hope for real-terms income growth. Yet households’ high levels of debt mean rate rises bring, with a lag, a different form of pressure in the shape of repayment burdens. Getting the balance right between controlling inflation and avoiding a household debt hangover will be a critical determinant of the duration and depth of the living standards squeeze. But it is far from an exact science, and both monetary and fiscal policymakers will need to display great dexterity through the year if we are to end 2023 with green shoots of recovery.
Michael Wickens: Yes, but not if they are “green”.
Trevor Williams: Some sectors won’t see a fall in output, like fintech and gaming, and maybe food and drink.
Evan Wohlmann: We expect annual CPI inflation to moderate to around 4 per cent by December 2023 and real GDP to return to, albeit modest, annual growth in 2024. While higher interest rates will significantly dampen consumption, UK households benefit from relatively high levels of net assets to disposable income which will help mitigate against more adverse macroeconomic outcomes, and we expect only a gradual rise in the unemployment rate over the coming years. That said, we expect the UK’s longer-term economic challenges, including from Brexit and the potential permanent reduction in the UK’s labour supply arising from higher rates of inactivity following the pandemic, will keep real GDP growth below its potential rate, of 1.5 per cent, until 2026.
Linda Yueh: Provided that the global energy shock recedes and the cost of living crisis ameliorates, then the recession should start to ease by year end. Fiscal policy can help support incomes and stimulate investment, so there is merit in setting out a growth strategy in early 2023 that can set the economy on a course to recovery.
Azad Zangana: The green shoots of recovery should start to appear by the middle of 2023. Inflation will have fallen considerably by then, but interest rates will still be high.
In perspective: What is the best historical comparison for the downturn the UK faces in the year ahead?
Silvia Ardagna: History never repeats itself, unfortunately for forecasters.
Kate Barker: In my lifetime, the mid-1970s.
Nicholas Barr: I can’t think of a UK precedent — the issue is not a standard downturn, but structural adjustment after the pandemic. The thought occurs that the structural adjustment of countries in central and eastern Europe in the 1990s after the collapse of communism might offer some interesting insights.
Ray Barrell: The best comparison year to 2023 would be 1981, with high energy prices and tightening fiscal policy producing low growth. Subsequent increased growth came mainly from lower energy prices, and not because of an “Expansionary Fiscal Contraction”. See my discussion in: Barrell, R., (2014) ‘Macroeconomic policy and the 1981 budget: Changing the trend’ in Expansionary Fiscal Contraction: The Thatcher Government’s 1981 Budget in Perspective, edited by A. Needham and D. Hotson.
Charlie Bean: Few downturns are exactly alike. While I don’t expect inflation to prove quite as difficult to deal with as in the 1970s, the basic characteristics of the shock are similar to then.
Martin Beck: The primary drag on the economy over the next few quarters comes from the impact of high energy prices and inflation. So the closest parallel is with the recessions of 1974 and 1975, in the aftermath of the 1970s oil price shock. That said, the inflationary backdrop then was far worse than the present day, with pay growth in double digits, a wage-price spiral clearly in play and monetary policy unmoored from any inflation goal.
David Bell: Perhaps the best comparison is the 1973 recession when GDP took 14 quarters to return to its pre-recession level. A combination of an energy price rise and industrial disruption led to high inflation. Unemployment was 3.5 per cent between August to October 1973, and 3.7 per cent between August to October 2022. The steady increase for the remainder of the 1970s is unlikely to be replicated in this recession, which unusually coincides with a period of excess demand for labour.
Aveek Bhattacharya: I can’t think of a good historical comparison. This is a bit like a terms of trade shock, but the UK has its own currency and the privileges of being an advanced economy. The combination of high inflation and falling GDP makes this seem a bit like the 1970s, but the huge falls in real wages in prospect, coming on the back of such a long period of stagnation, mean that analogy doesn’t quite work either.
Danny Blanchflower: The Great Recession of 2008. There are striking similarities in the utter incompetence of the MPC that failed to spot that inflation was transitory and drops in output were much worse on both occasions — fiddling while Rome burns once again.
Philip Booth: The mid-1970s, when there were simultaneous supply shocks with mismanaged monetary policy.
George Buckley: UK recessions have typically been much larger than the 2 per cent we expect this time round. However, the most modest of the UK’s previous recessions was that experienced during the early 1990s, when GDP fell by 2.7 per cent from peak to trough. So we think there will be similarities between the current downturn and that of the 1990s in scale, but similarities with the 1970s recessions in terms of causation, ie war-related energy shocks.
Robin Carey: The current socio-economic challenges facing the UK are unprecedented, and unlike those we have seen in the past. However, certain obstacles facing us, such as rising inflation and decreasing levels of investment, do recall the “winter of discontent” that came at the end of James Callaghan’s government.
Jagjit Chadha: Interesting question. In 1726, the British economy suffered its third recession of the decade. A number of shocks contributed to the downturn. Real GDP fell by 3 per cent in 1726 and by 0.6 per cent in 1727. The downturn was quite diffuse. Source: “Dating Business Cycles in the United Kingdom, 1700-2010”, Stephen Broadberry, Jagjit Chadha, Jason Lennard and Ryland Thomas, Economic History Review (forthcoming).
Victoria Clarke: There is no one historical period that encapsulates our view of 2023, although there are similarities with different periods across history. There are commonalities with the early 1990s recession, with our forecasts showing a similar annual decline in GDP, in a relatively shallow recession. We continue to view high inflation as the primary force driving the contraction in GDP, amidst a significant and continued real income squeeze. The inflation of 2022, which continues into 2023, has mixed origins, both in supply-side issues and on the demand side. Firstly, supply chain disruption post-pandemic lifted inflation, with these inflationary forces added to by the impact of the war in Ukraine on energy prices. Resilient demand has also been a factor underpinning the strength of inflation, although we expect much weaker demand in 2023. There are similarities with the energy price inflation of the 1970s, but there are also important differences with this period too. The tight UK workforce, and the relatively small rise in unemployment that we expect to see, do not fit neatly into one historical box. Indeed, the rise in participation has turned on its head a multi-decade trend of rising UK workforce participation. Finally, turning to the housing market, it is notable that the weakening housing market that we expect this year will not be added to by rising unemployment, in our view. This underpins our view that the fall in house prices will be relatively shortlived.
David Cobham: It’s difficult to think of any other postwar UK downturn caused by poor supply-side policies (Brexit) on top of very poor demand-side policies (austerity).
Anonymous: The temptation of looking back to the 1970s is misleading. The institutional framework is radically different — no financial repression, and higher participation. In financial markets, higher household debt, no capital controls, no large aggressive unions, a technology that is arguably more adaptable, and a clear perception of the costs of inflation in this context. Episodes of geopolitical fragmentation cutting production chains and market links could provide some insight, but none fit in my view.
Diane Coyle: Late 1970s.
Bronwyn Curtis: There is no historical comparison. There have been multiple shocks to the UK economy over a relatively short period of time. The combination of the introduction of quantitative easing, Brexit, Covid and an energy shock has created more challenges than I have seen before.
Paul Dales: Probably the one in the mid-1970s, when there was also a nasty mix of high inflation and a global recession. During that downturn, real GDP contracted by 1.9 per cent.
Richard Davies: The best advice is to beware of historical comparisons. We haven’t seen anything quite like this before. What is unique is the combination of a strong labour market — low unemployment, high vacancies — with weakening output and underlying weak productivity. This rules out the comparison with the 1970s and the early 1990s, for example. Go back further than this and comparisons break since the exchange rate, and flow of capital, was so different. So economists need fresh thinking, rather than historical playbooks.
Howard Davies: It is tough to find an analogue for what we face now. We are in uncharted waters.
Panicos Demetriades: This is a very tough question. I believe the global economy and, in turn, the UK are in uncharted waters. The oil shock of the 1970s wasn’t due to war and Russia was never the country that [it] is today. Even in the depths of the cold war, there was less uncertainty and more predictability. In the UK, we have never had such a poor record, including abrupt U-turns, in macroeconomic management. Having said that, the monetary policy framework, not just in the UK but also in all developed economies, is now much stronger than it was during the 1970s, due to the adoption of inflation targeting. This offers legitimate hope that inflation will come down much more quickly than it did in the 1970s.
Colin Ellis: This is a tough one. It doesn’t feel as destabilising as the 1970s, yet. Hopefully, the overall downturn will be relatively shallow, if long-lived — maybe more treading water than drowning.
Martin Ellison: The Great Depression.
Noble Francis: The most appropriate historical reference point for the UK economic contraction in 2023 would be the 1970s. However, the current economy is considerably more dependent on consumption than on production than in the 1970s. This certainly isn’t 1990 or 2008 and this economic contraction is not likely to be as large.
Marina Della Giusta: The mid-1970s situation.
Anonymous: 1974-75.
Andrew Goodwin: Our forecast of a 1.3 percentage points peak-to-trough fall in GDP is much shallower than all of the other recessions of the past 50 years. The key difference this time round is the absence of serious imbalances that characterised most of the previous downturns.
Paul De Grauwe: The stagflation of the 1970s is one historical comparison. It was a period of negative supply shocks pretty much like today. Another historical comparison is the decision of the British government in 1925 to return to the gold standard. This policy mistake led to a decade of low growth in Britain. Brexit was probably a worse policy mistake that will put Britain on a low growth path for years to come.
Brian Hilliard: One doesn’t really come to mind. The mix of factors leading up to this recession is unique.
Jessica Hinds: The 1.5 per cent peak-to-trough drop in GDP that we expect in 2022-23 is most similar in scale to the recession of the mid-1970s.
Paul Hollingsworth: While high inflation and widespread industrial action hark back to the 1970s-80s, we think the UK is facing more of a 1990s-style recession in terms of its depth. That said, we think the recovery is likely to be more sluggish than back then.
Ethan Ilzetzki: Knowledge of history should guide our analysis and policy, but I don’t think straight-up historical comparisons are useful. While there are some similarities to the 1970s, central banks had a different role and strategy at the time than they do today, and the structure of the economy is very different. The labour market may now be in the midst of a supercycle of scarcer labour and reliance on imports from China is more tenuous.
Dhaval Joshi: 2023 = 1982 Because: 1) in 2023, just as in 1982, central banks are obsessed with killing inflation even if the price is a deep recession; 2) financial markets in 2022 behaved identically to that in 1981, so it is a perfect set up; and 3) very strong geopolitical parallels, eg Russia-Ukraine war = Iran-Iraq war.
DeAnne Julius: Because employment is so strong as the UK goes into recession, I expect this to be the shallowest recession in recent UK history with the total reduction in GDP much smaller than in either 2008-09 or 2020-21.
Stephen King: 1973-74 or 1979-80. Yes, there are big differences, but a huge terms of trade shock, a refusal to accept inflation might be a serious problem, a miserable productivity record, deteriorating industrial relations, a government scrabbling for ideas . . . I could go on . ..
Lena Komileva: The 1930s.
Anna Leach: It’s a relatively mild downturn overall — the smallest projected decline in GDP by the standard of recent recessions, but one underpinned by some notable records: namely, the level of inflation, the highest in 40 years, and the pace of the decline in living standards, worst on record. That mix makes it hard to pick an easy comparator. Energy is the dominant driver of the weakness, so perhaps the energy crises in the 1970s might be the best period of comparison.
Warwick Lightfoot: The best comparison is the 1970s. The collapse of Bretton Woods led to a huge injection of liquidity in the world economy, the Nixon administration’s politically charged “we are all Keynesians now” and a Federal Reserve that was behind the curve in the conduct of domestic monetary conditions combined to set off a general American-led inflation and commodity super price cycle. This was then amplified by a war in the Middle East that raised energy costs further and reduced the terms of trade and living standards of the wealthy western democracies.
John Llewellyn: There is none, because on no previous occasion did the UK choose to make it more difficult for itself to export to its major market.
Gerard Lyons: Naturally the 1970s, given the havoc caused by high inflation, and the need to address stagnation. But there are also important lessons to take from other periods, too.
The danger is the UK may experience a triple deficit problem. We have been used to a twin deficit problem — a high budget deficit alongside a trade, or current account, deficit. Now, the challenge is: what happens to the private sector’s balance sheet? This is critical. Thus there are lessons from the [Nigel] Lawson boom and bust of the late 1980s. For instance, in the late 1980s the economic consensus and the markets were very upbeat with chancellor Lawson’s boom, because of the great shape of public finances — with a budget surplus. As was clear at that time, not enough attention was being focused on the huge build-up of the private sector’s liabilities. Then, there was a large rise in private sector debt, including consumer credit and mortgage equity withdrawal. Likewise, what happens to the private sector balance sheet now will be critical.
Also, the post-second world war era is relevant in terms of misplaced current concerns about public finances. Then the ratio of public debt to GDP was high, and the lesson from then is the crucial need for sustained economic growth to bring the public finances into shape.
Stephen Machin: There isn’t one. There are some common components with aspects of previous downturns. But the current overall picture is very different in a number of important dimensions, in particular, to do with the labour market, scope for productivity growth and the country’s position in the global economy.
Chris Martin: With luck, the 1970s. Most likely, the 1930s, for the length of time that the economy stagnates.
David Meenagh: The downturn shouldn’t be very deep, though fairly long lasting.
Costas Milas: My feeling is that the downturn will be slightly lower than what we experienced in 1990-91.
Stephen Millard: Hard to think of an exact comparison. Maybe the early 1990s recession, although the fall in real income at that time was much less than the fall in 2022-23.
John Muellbauer: Two historical episodes are relevant: the oil shocks of the early 1970s and the post-Thatcher recession of the early 1990s, which followed the 1980s house price and credit boom and high levels of indebtedness of UK households. The rise in nominal interest rates, and hence in debt service costs, led to a major mortgage market crisis and record arrears and repossessions.
Gulnur Muradoglu: 1970s, high-inflation period with strikes.
Andrew J Oswald: The oil shocks of the 1970s.
David Page: In many ways each downturn is unique and no historic comparison is perfect. The 1990s provides some analogy with a significant energy shock and coming off an overheating economy. However, the 1970s is more obvious, with severe supply side shocks and significant overheating. That said, we do not expect a downturn as severe as either of those episodes and are hopeful that the adjustment likely necessary in the labour market will not prove as severe as either of those.
Alpesh Paleja: There doesn’t appear to be one, really. We expect the downturn to be relatively mild and shortlived, with output falling to a smaller degree than the recessions in 2008-09, the 1990s and the early 1980s. Though, of course, it may feel much worse for many vulnerable households and businesses. The UK economy saw a few shortlived contractions in the 1950s and 1960s, which seem more comparable to this recession — though, of course, that was a very different economic environment.
John Philpott: All downturns and recessions are unique, so historical comparisons are always somewhat problematic. In some ways, the current economic situation resembles the late 1970s, which led to the big fiscal and monetary squeeze of the early 1980s and the subsequent recession. However, today’s flexible deregulated labour market virtually rules out the threat of wage-price spirals from real wage resistance so that deflationary policies work more effectively, thereby limiting the required hit to output and employment assuming fiscal and monetary is conducted sensibly.
Kallum Pickering: A major global energy supply shock, political crisis, a war with global consequences, surging inflation and rising interest rates. It is common to hear people say either that the UK is heading back to the 1970s, or that it never really solved the problems that led to the 2008 financial crisis. But those periods were defined by major problems with underlying fundamentals. That is not the situation today. Today’s problems feel much more like the early 1990s — back then, it felt as if the world was coming to an end. But by the mid-1990s the economy was booming. The lesson from history is clear, present circumstances are no guide to future performance!
Christopher Pissarides: Late 1970s and early 1980s are still the best comparison, but policy now is handling it better than back then — at least, we are not likely to call in the IMF to rescue us.
Ian Plenderleith: I don’t know of one in recent history — a recession with high employment is sui generis and we need some serious economic analysis to tell us what’s happening and why, and what the appropriate policy response is. But I suspect most of the policy action needs to come on the supply side, eg greater decentralisation and higher immigration.
Jonathan Portes: Well, in contrast to some of the overheated rhetoric, it’s not the Black Death. Perhaps 1794-95, when a mild autumn was followed by a very cold winter, and food prices soared as a consequence of a poor harvest and disruption to trade with the continent. As Jenny Uglow wrote, “in many people’s minds the bread shortages were linked to the war, the government and official corruption”. The government refused to legislate for an increase in wages and responded forcefully to the resulting unrest with repressive measures.
Richard Portes: No obvious comparison. Certainly not the 1970s, nor the early 1980s, nor the early 1990s.
Vicky Pryce: There isn’t a clear and direct historical comparison with what we are going through now. The Covid lockdowns and the supply dislocation that followed were pretty unprecedented. But there are some comparisons of what we are experiencing now in the UK with the late 1970s’ “winter of discontent” at a time of another energy crisis. But then it was mostly, at the beginning, at any rate, started by a series of private sector strikes that then spread across to the public sector, whereas now it is mostly public service workers striking where trade unions are still powerful. And we are unlikely to see a repeat of the hyperinflation we saw in the latter part of the 20th century or the double-digit interest rates of that time. In fact, the main worry now as inflation starts slowing is that we could see a repeat instead of the [George] Osborne austerity post-financial crisis; that could cause serious further and sustained damage to the UK’s productivity and growth.
Thomas Pugh: The current recession has a fair amount in common with the early 1990s’ recession. Both were caused by soaring energy prices, rapidly rising inflation and tightening monetary policy. We expect this recession to be the same length, five quarters, and similar in depth — a 2.5 per cent fall in GDP this time versus a 2.7 per cent fall in the 1990s.
However, there are some key differences. The economy went into this recession in pretty good shape. Households’ balance sheets are strong, with excess savings worth 10 per cent of GDP, and the financial sector is well capitalised. These factors will prevent the recession from turning into a financial or housing market crisis. Pay growth has been well below inflation this time, which has exacerbated the hit to households’ real incomes but has also avoided a wage-price spiral and reduced the need for very high interest rates.
And the tightness of the labour market means that even though unemployment will rise, we do not expect it to surge, especially in sectors experiencing a skills shortage. The labour market is incredibly tight because of a lack of supply of labour, not because of an excess demand for workers. And, given the recent challenges firms have had in recruiting staff, and the relatively short recession, firms will have more of an incentive to hoard labour than in previous periods of economic weakness. The exceptionally tight labour market probably explains why, in this quarter’s RSM UK Middle Market Business Index, 41 per cent of firms said they hired more staff in the fourth quarter, despite the dire economic outlook. All in all, we expect the unemployment rate to peak at about 5 per cent this time, compared to 10.7 per cent in the early 1990s.
Morten O. Ravn: The last episode of commodity-driven inflation that we had was in the 1970s. Hopefully, we have learned from the mistakes made back then.
John Van Reenen: 1970s — oil shocks and initially tight labour market causing stagflation
Ricardo Reis: I don’t know.
Anonymous: Second oil price hike in the late 1970s.
Matthew Ryan: None in recent memory — certainly not mine!
Jumana Saleheen: In terms of the depth and length of the recession, the best historical comparison for the 2023 recession is the early 1990s. We expect UK output to fall by about 1-1.5 per cent in 2023. There will be similarities and differences to the 1990s recession.
In terms of differences, the feel will be different to the 1990s. The 2023 recession could be characterised as the “Zoom Recession”, where sectors that benefited the most from the era of low interest rates, such as tech and real estate, end up suffering the most. In terms of similarities, we think that 2023 will be like a typical recession in that we will see the interest sensitive sectors, such as corporate investment, and the consumption of durable goods, electronic and white goods falling the most.
Michael Saunders: Such comparisons are likely to be misleading. High inflation and low potential growth have echoes of the 1970s rather than the more recent decades, but the institutional framework — the MPC and the OBR — is much stronger now than in the 1970s.
Yael Selfin: In terms of size, the current downturn is expected to be similar to the recession that began in the second quarter of 1990. Then the peak-to-trough fall in GDP was 2.75 per cent, while we expect the current recession to see a fall of 1.9 per cent. These are much milder falls than the 6.3 per cent decrease in 2008-9 and the 4.5-4.1 per cent falls in the 1970s and 1980s. However, in terms of duration, the expected six quarters of contraction of the current recession would be the longest continuous fall in GDP that the UK has faced since quarterly data were first compiled in the 1950s.
Andrew Sentance: This is the first inflation-driven recession we have seen since the early 1990s. It has more in common with the mid-1970s, early 1980s and early 1990s recessions than more recent downturns in 2008-09 and 2020.
Philip Shaw: Each downturn has its unique features and there is no perfect comparison. However there is a shade of the early 1980s here — inflation broadening out after an energy price shock, strikes and fears over escalating pay deals, concerns about the underlying pace of economic growth, and the need for fiscal restraint. We just hope that the route out of the downturn on this occasion is not as protracted.
Andrew Simms: Because the UK faces action on a climate emergency that is unprecedented — civilisation has never before experienced the climate it has created by burning coal, oil and gas — there is no adequate historical comparison. That it has simultaneously to deal with serious inequality and the fallout from leaving the EU and a global energy price shock further complicates any comparison. However, at the time of the 2007-8 banking crisis, there was also an oil price shock and a huge disruption to the global food supply chain linked to extreme weather events. Back then, further harking back to precedents of economic upheaval, colleagues and I proposed a Green New Deal, including financial market reforms and public investment in zero carbon transition, as a fairly comprehensive solution to the UK’s problems. The failure of the government to act back then means vital elements of that important work remain undone.
Worse still, the BoE warns that government plans to weaken banking regulations again risk returning the UK to the reckless pre-financial crash days. Another, more hopeful comparison in terms of having high ambition to solve generation-defining challenges is the UK’s postwar period when, in debt and with a shattered economy and population beleaguered by years of trauma and hardship, the country nevertheless built the NHS, and managed a social housing programme under both Conservative and Labour governments that built more than 200,000 homes a year. The lesson is that, whatever the downturn faced by the UK this year, a realistically funded, Green New Deal-type programme is the best medicine for turning the economy around, levelling up and preparing the UK for the world it has to face.
Nina Skero: There isn’t a good historic example of a downturn characterised by a tight labour market, high inflation and a real earnings decline. It is a rather odd combination, which means we once again find ourselves in unprecedented times.
James Smith (RF): It’s tempting to compare the current situation to the 1970s. But while this is true in terms of the shocks facing the UK economy — indeed, the rise in energy prices is much larger this time — the different institutions for monetary policy and wage setting should mean the impact of the rise in energy prices on inflation will be far less protracted.
James Smith (ING): None of the recent recessions, or downturns [in the] last 30-40 years are likely to exactly resemble the one that we, and most economists, are predicting for next year. In pure GDP terms, the 1990s recession is probably the closest match. The approximately 2 per cent peak-to-trough fall in GDP seen back then isn’t so dissimilar from our forecasts for the 2023 downturn. But more than half of the fall in output in that recession was in construction, and while this is an area that’s likely to suffer next year, it’s unlikely to be the dominant driver. The 1990s recession was also coupled with a 3-4 percentage points increase in the unemployment rate, something that wasn’t matched in the global financial crisis despite a much larger output fall. We’re likely to see a more modest impact in the jobs market this time given the historic starting point of high vacancies, and chronic labour shortages. Labour hoarding seems likely, and reasonably resilient employment numbers should hopefully help limit the scale of the downturn.
Andrew Smithers: None; it is unusual to be facing a downturn when the lock of tangible investment in recent years, combined with a deterioration in the terms of trade, imply zero trend growth.
Alfie Stirling: I don’t think there is a particularly useful historical comparison.
Susannah Streeter: The UK seems to be in a 1970s time warp with runaway food prices, industrial unrest and spikes in energy prices causing economic pain, and [the] recession we are heading for is similar to the contraction the UK experienced between 1973 and 1974. This was triggered by another energy shock — the oil crisis of 1973, which unleashed fresh inflationary forces on top of an expansionary price cycle made worse by strikes and a misguided government attempt to boost growth. The contraction was shorter but sharper compared to the forecast for the recession currently rolling in, but job losses were shallower.
It was followed by a double-dip recession in 1975, and there is still a risk that this coming recession could last longer than currently expected. The OBR’s prediction for a year-long recession was largely based on an expectation that households, which were lucky enough to be sitting on piles of savings, would keep spending, particularly as inflationary pressures ease next year. However, it seems consumers are proving more risk averse, particularly those on lower incomes. At the very least, growth is set to remain sluggish, and inflation is slow to come back to target.
Michael Taylor: The early 1980s recession is the last one that included both a material fall in real household disposable incomes and higher interest rates, like now. But the early 1980s recession was exacerbated by a shakeout in manufacturing and a large increase in unemployment, neither of which apply this time.
Suren Thiru: We expect the looming downturn to be similar to the last inflation-driven recession in the early 1990s, with a peak-to-trough fall in GDP of around 3 per cent, much milder than the Covid recession and the global financial crisis. Consumer-focused services firms, including those in retail and hospitality, will feel the brunt of the recession as people cut back on discretionary spending. Business investment is likely to contract by more than overall GDP, as company spending on new projects is typically among the first areas to be cut during a downturn.
Phil Thornton: The 2009-10 recession and anaemic recovery probably give the best road map. The downturn has not been as severe but the recovery will be as lacklustre. This time, rather than from financial sector failures, it will be the after-effects of a hard Brexit that will hang over the economy for years. A likely housing market correction or crash will not help either.
Samuel Tombs: The downturn ahead doesn’t perfectly match any of those before it, but the early 1990s recession provides the closest parallel. As now, the economy was crushed by a combination of excessive consumer price inflation and rapid increases in interest rates to deal with the problem. The housing market also was precariously placed entering the recession, as it is today.
Kitty Ussher: 1992 — high inflation, rising interest rates and a monetary policy shock (ERM vs “mini” Budget). However, the situation now is not nearly as bad because interest rates are rising from a much lower base and more of the inflation is externally generated now than was the case in the late 1980s.
Keith Wade: All cycles differ, but the current period has similarities with the downturn of the early 1980s when a recession was needed to bring down inflation.
Sushil Wadhwani: It is difficult to think of an appropriate historical comparison. The real income shock is, on some measures, worse now than in the 1970s. Further, central banks were not independent then and inflation expectations had been de-anchored for several years by the early 1970s.
Ross Walker: The early 1990s recession stemmed from aggressive monetary policy tightening in response to runaway inflation, so that perhaps offers the clearest parallel — though we do not expect the same severity of recession this time.
Martin Weale: There is no good comparison. While I am reminded of the 1970s, it must not be forgotten that productivity growth was much better than it is now.
Simon Wells: It’s tempting to say the 1970s. Inflation is high and expected to fall, yet the UK is facing a “winter of discontent”. Real wage resistance could add yet another pressure on firms’ costs and unit labour cost growth could rise to levels not seen for decades. This echoes the situation in the 1970s, when pay increases became divorced from productivity and a wage-price spiral began. This adds to other persistent cost headwinds to firms. The impact of Brexit is still reverberating through the economy. Globally, the days of “hyperglobalisation” are behind us and new forms of protectionism have emerged. However, unlike in the 1970s, the monetary policy regime is better equipped to keep inflation expectations anchored.
Michael Wickens: The closest is 1973-5, which was the last time the UK was hit with large negative supply shocks. Most of the other downturns were due to demand shocks, where monetary policy can be much more effective than it is for supply shocks. The message from the 1970s is that the countries that reacted most strongly to control inflation were the first to recover afterwards. They did not include the UK.
Trevor Williams: The economic drift before 1981-2 — the UK needs a new economic paradigm. Leaving the EU has been a big blow. Where is the vision and economic strategy for the future? There does not appear to be one.
Evan Wohlmann: There isn’t one — the severe energy crisis coming shortly after the pandemic shock presents an unprecedented set of challenges for the UK and Europe as a whole.
Linda Yueh: The 1970s, since we are facing “stagflation”, which was followed by a global recession in the early 1980s. But there are differences. As Mark Twain observed, “History doesn’t repeat itself but it does rhyme”. So, there are lessons we can learn from that period and we should certainly try not to repeat its worst mistakes.
Azad Zangana: The expected recession is comparable to those seen in the early-to-mid-1990s. More traditional cycles where interest rates are raised to slow growth, to combat inflation. This will come as a relief to those comparing this period to the global financial crisis, or the pandemic. At this stage, we do not see any serious systemic risks that would cause a prolonged recession. However, where this cycle differs is that households have huge excess savings built up during the lockdown period in 2020-21. This is helping to support household spending to outperform expectations.
Is there anything else you would like to tell us?
Ray Barrell: Diverging downwards from international capital standards and giving financial regulators the remit to improve competitiveness may raise growth a little, but it also raises the risk of another financial crisis. Financial deregulation will give short term gain ahead of an election and long-term pain afterwards.
David Bell: Sometime during 2023, the government will recall that it published a “levelling up” white paper in February 2022 intended to “end the geographical inequality which is such a striking feature of the UK”. There may be individual projects that can be highlighted, but the hope of any significant reduction in measurable disparities across regions before the election will prove vacuous.
Danny Blanchflower: 2023 is likely to be a disastrous year for the UK economy. My guess is the drop in output will be much greater than in 2008-09 — perhaps of the order of negative 5 per cent, although dependent on policy response.
Robin Carey: Sadly, I believe that the difficulties that the UK has been dealing with in 2022 are likely to continue and develop as we move into 2023. As high streets and retail chains continue to collapse, more towns and city centres will struggle to attract business. The growing discontent amongst workers in several industries will likely lead to more of the action we are already seeing as we move into the new year.
Jagjit Chadha: The country seems likely to continue with anaemic growth for some years to come. This will contribute to a widening of household and regional inequalities in the absence of a decisive and sustained policy response, which seems unlikely given the events of the “mini” Budget and the caution that has subsequently been adopted.
Anonymous: There could be financial issues ahead, both domestically and internationally. Emerging markets may be facing increasingly adverse borrowing conditions, as creditor countries may also be facing deteriorating financial and fiscal conditions, and perhaps some turmoil. If you look for historical episodes that can be of inspiration, think of 1919. The US refused to cancel debt to the allies. These, in turn, charged high reparation payments to Germany. Not directly related to the world today, but a useful reference highlighting the problem.
Diane Coyle: The UK is in a structural hole, not a cyclical downturn. Until there is a government with an adequately long-term economic strategy it can get through parliament, economic performance (and prospects for improved living standards) will be disappointing.
Paul Dales: Much hinges on what happens to the UK’s labour force. If it starts to grow, then suddenly both the inflation and GDP growth outlook become much brighter. If it doesn’t, then the UK could find itself lagging behind its peers for a few more years.
Richard Davies: Housing policy must not be forgotten in all of this. I was struck when talking to people at the Festival of Economics — not a scientific sample, but hundreds over three days — that we are living through a period in which Britons of different ages are talking at cross-purposes. In particular, Gen X and above interpret the cost of living crisis as food and energy inflation. Those that are younger are not talking about groceries when they use the same phrase. They are talking about housing costs.
Colin Ellis: It’s probably worth remembering that positive shocks do still happen from time to time. We’ve had a lot of negative ones recently, but sometimes unexpected good things can happen.
Anonymous: Without being able to predict the outcome of the Ukraine war, predictions for 2023 are uncertain.
Brian Hilliard: The self-inflicted wounds of Brexit and the Truss debacle will leave a long trail of destruction in the economy.
Paul Hollingsworth: If there’s anything we can be fairly confident about, it’s that 2023 is unlikely to see a swift return to economic and geopolitical stability. Forecasts will be wrong, but in which direction and by what magnitude, remains to be seen. Headwinds to the economic outlook continue to build, and widespread industrial action over the fourth quarter highlights that the political and social pressures generated by high inflation, and a deteriorating economic backdrop, are significant.
For central banks, the biggest challenge will be to calibrate policy tightening in order to successfully, and sustainably, rein in inflation without inflicting unnecessary damage to the economy. In a world where central banks do not have a good grasp on where the neutral rate of interest is, where the natural rate of unemployment lies, whether monetary policy lags have lengthened or shortened compared to history, what the impact of quantitative tightening on the economy is and what the effects of a global synchronised policy tightening on the scale we are currently seeing will be, the risk of a policy mistake is elevated.
Elsewhere, I worry particularly about the lasting damage to the labour market from both Brexit and the pandemic, with the significant rise in labour force inactivity due to long-term sickness particularly shocking, and not helping when it comes to inflation. Finally, we are at least more optimistic that the tone of UK-EU relations in 2023 will be more constructive than in 2022, particularly with respect to the NI protocol as we approach the 25th anniversary of the Good Friday Agreement.
Dhaval Joshi: There will be another tail event in 2023. By definition, we do not know its exact nature and timing, but the statistical probability is higher than most people assume.
Stephen King: Merry Christmas . . . and my new book, We Need to Talk About Inflation, will be published by Yale in April . . . Shameless advertising!
Barret Kupelian: There are quite a lot of other changes happening in the UK, some of which we cover in PwC’s UK economic predictions piece. These include: French workers will overtake the Brits as the fourth-best paid workers in the G7, as British real wages fall back to their 2006 levels; the weekly food shop will cost the average household around £100, more than twice as much as it cost at the start of the century; the total number of divorces will spike by one-fifth to almost 140,000 in England and Wales, equivalent to 16 divorces every hour; and . . . it’s coming home! The England Women’s team will succeed where the men failed and bring home the World Cup in the summer of 2023.
Warwick Lightfoot: Advanced economies including the UK have to learn again how to use monetary and fiscal policy as tools of macroeconomic demand management and co-ordinate them in a coherent manner. The UK’s central bank has to demonstrate the institutional will power to deliver on its inflation target, and the Treasury needs to review the inflation target, the role of intermediate objectives in supporting it and how the inflation target functions in the context of asset price movements, including movements in the exchange rate.
John Llewellyn: The US is likely to experience only a moderate slowdown, being self-sufficient in both food and energy. The EU is less well placed and set for a recession because, while self-sufficient in food, it is not in energy. But the UK is set for the deepest recession in the G7 because, self-sufficient neither in food nor in energy, it is losing further income because of Brexit.
Chris Martin: Sorry to be so miserable!
Costas Milas: FT readers, and rightly so, will question our forecasts for 2023. Their scepticism is fully justified. We, financial economists, had a tough time over the past 22 years or so. We responded to our failure in forecasting the 2008-09 financial crisis by introducing financial stress measures into economic models. We responded to the Covid pandemic by updating our models with infectious disease trackers. In response to the war in Ukraine, we are now monitoring geopolitical risk measures. That is, we have been flexible enough to revise our models and thinking, but we still have a lot of catching up to do — and credibility to re-establish! — in this fast-evolving economic world.
Andrew Mountford: Corruption is a real danger for the long-run productivity and prosperity of the UK economy. One of the most influential academic economic research agendas in recent years has been that of Acemoglu and Robinson on “extractive” versus “inclusive” institutions, summarised in their book Why Nations Fail. They argue that the contrasting levels of productivity and wealth between countries stems from the difference in institutional quality. They illustrate their argument by comparing the paths to success of the richest people in Mexico and the USA (p. 39). The richest man in Mexico, they allege, became ultra-wealthy through government regulated monopolies and political contacts, whereas the success of some of the wealthiest people in the USA stems from technological innovation. One doesn’t have to uncritically accept all aspects of their thesis to be persuaded of the very harmful long-run effects for an economy if success becomes ever more determined by personal contacts and access to lucrative public contracts rather than productive and innovative activity, or in Acemoglu and Robinson’s terminology, if institutions become extractive rather than inclusive. Inclusive institutions protect the public interest, nurture talent and allow effort to be rewarded. Examples include legal institutions and law enforcement that protect property rights, educational and training institutions, financial regulations that enforce financial fair play and tax authorities that ensure large companies pay the same tax as small local companies. These institutions are a vital public good and they require adequate investment.
The natural way to fund vital public investment, which underpins the wealth of the entire economy, is by a tax on the wealth of the entire economy. In the UK, this would be most practically achieved by taxing the value of land. Land cannot be moved to evade taxation and its price depends as much on the ability of people to pay for it — ie on the health of the economy, local planning policy and regional investment, as on the actions of the landowner. The ONS estimates the value of land and assets-over-land to be significantly more than £5tn compared to a GDP of a little more than £2tn. Thus a 1 per cent tax would be worth about 2.5 per cent of GDP and so could back substantial spending each year. This would allow for a positive annual public investment flow backed by additions to the stock of public owned assets which can be realised later.
John Muellbauer: The UK has returned to the 1970s epithet of being “the sick man of Europe”. The “Thatcher cure” hasn’t worked. The Brexiteers’ goal of making the UK “Singapore-on-Thames” is a delusion based on a profound misunderstanding of Singapore.
Andrew J Oswald: Young economists have not lived through times like these. I am afraid we all learn by painful experience.
Christopher Pissarides: The election is creating more uncertainties because the government is keeping an eye on the polls and it might shy away from tough policies needed to boost investment. This is another uncertainty that weighs more heavily on the UK than its peers.
Vicky Pryce: Looking ahead, I worry about the increasing isolation from Europe and the lack of a proper industrial policy and sufficient funding that could all result in the UK struggling to remain competitive in many areas, including in climate change. And as we learned from the 2008 crisis, putting all our eggs in an increasingly deregulated financial sector to save us is a very risky strategy.
Morten O. Ravn: Hopefully, the UK will be able to get its fiscal policy right. The austerity package in the wake of the financial crisis was costly and probably contributed to the UK’s current problems, as was the “Truss experiment”. And one might fear that the Sunak administration’s renewed appetite for austerity will make things worse. This could all have been avoided by better designed policies aimed at improving the credibility and efficiency of the UK fiscal regime.
John Van Reenen: The key to long-term recovery is to deal with productivity slowdown. Need a credible Growth Plan (eg: https://cep.lse.ac.uk/LSE-Growth-Commission/files/LSEGC-2012-report.pdf). Need more investment through policy stability and tax reform, decent vocational training and skills system, a closer relationship with the EU and real support for innovation.
Ricardo Reis: On the last question business investment at pre-pandemic levels would still be disappointingly low, and not enough to sustain growth.
Michael Saunders: The neutral nominal level of interest rates in coming years is likely to be higher than the pre-pandemic period, because of higher inflation expectations and a more volatile inflation climate.
Yael Selfin: Poor investment and exports performance remain a major worry for medium-term growth.
Andrew Sentance: Political chaos and uncertainty have badly affected UK economic prospects since the Brexit vote.
Andrew Simms: In spite of the clearest science and warnings, there is still scant evidence of governments fully understanding and acting on the imperative of the climate and ecological emergency, as if they have failed to understand that this is the frame for all economic policy and that adequate action is non-negotiable. At the launch of its latest report, the IPCC commented that “any further delay in concerted global action will miss a brief and rapidly closing window to secure a liveable future”. On the same issues, António Guterres, UN secretary-general, using highly unusual, undiplomatic language said: “The abdication of leadership [on climate action] is criminal . . . delay means death . . . now is the time to turn rage into action.”
In words that could have been pointed directly at the UK government, he said: “Climate activists are sometimes depicted as dangerous radicals. But the truly dangerous radicals are the countries that are increasing the production of fossil fuels. Investing in new fossil fuels infrastructure is moral and economic madness.” The latter sentiment has been echoed by Fatih Birol, executive director of the usually conservative International Energy Agency.
When Rishi Sunak was embarrassed into attending COP27, he talked of the UK’s climate leadership and boasted of the UK’s climate finance going to Kenya. This overlooked the UK breaking its aid commitments, failing to meet its global contributions and the fact that Kenya already produces more than 80 per cent of its electricity from renewables, with the UK producing only 38 per cent. Other countries ranging from Costa Rica, to Paraguay, Ethiopia, Uruguay, Iceland, Albania and Bhutan produce 100 per cent renewable electricity. Signals matter in politics, and for the UK to regain any credibility it will need to backtrack on fracking, and on issuing new North Sea oil and gas licences.
A better signal would be for the UK government to follow London’s leadership and back a Fossil Fuel Non Proliferation Treaty, endorsed by the EU parliament, other major global cities from Sydney to Kolkata, thousands of scientists and more than 100 Nobel Prize Winners. For the UK to have a future it needs to let go of its fossil fuel past. There are other ways, too, in which we could stop promoting our own self-destruction. We could follow the life-preserving precedent of the ban on tobacco advertising and stop advertising high carbon products and lifestyles, from the fossil fuel companies themselves to gas-guzzling SUVs and flights. At the city level, from Amsterdam and The Hague to Stockholm and cities such as Norwich and Liverpool in the UK, policies are being passed to end such “badverts” in the public domain. Change is easier when you are not surrounded by adverts to stay the same.
Andrew Smithers: More tangible investment is essential to raise trend growth to a significant positive rate. This can be done by cutting corporation tax and increasing the credit for tangible investment, provided that the credit does not take the form of accelerated depreciation. Unfortunately, there is no sign that this is understood by the government, the opposition or the press including, I regret to write, the FT.
Kitty Ussher: Many of these questions are false choices. The workforce is likely to grow through migration and population growth, not necessarily due to dropouts returning, although there may be a slight dropout reversal effect. Pre-pandemic levels of business investment were low because of Brexit uncertainty. Business investment may well be higher than official forecasts but that would be because the worst of the inflationary peak and equity market fall is perceived to be behind us, leading to a more risk-embracing sentiment in the markets, regardless of Brexit.
Martin Weale: Wage increases are likely to stay higher than the BoE assumes and CPI inflation will probably also prove more persistent.
Michael Wickens: 1) Welfare benefits from low inflation and high growth. Currently, we have high inflation and low growth. 2) Monetary policy has been too loose and fiscal policy is too tight. 3) The MPC requires members who are experts in monetary policy, as they were when the MPC was first set up and monetary policy was successful. The Treasury evidently disagrees. The BoE’s mistakes are therefore not a complete surprise.
Trevor Williams: The UK will perform the worst of the G7 economies this year, dragged down by a lack of investment, public and private, and weak employment growth, meaning poor productivity.