- Written by Daniel Thomas
- Business reporter
Image source, Getty Images
Government forecasts say the UK economy will grow much more slowly than expected in the next two years, as inflation takes longer to fall.
Living standards are also not expected to return to pre-pandemic levels until 2027-28, the Office for Budget Responsibility (OBR) said.
It comes as the Chancellor of the Exchequer announced tax cuts and benefits increases in his autumn statement.
Labor said people were still paying the price for the Tories’ “economic recklessness”.
The Office for Budget Responsibility, which is independent of the government, publishes two sets of economic forecasts annually, which are used to forecast what will happen to government finances.
These are based on your best guess about what will happen, and are subject to change.
According to the watchdog, the UK will grow by 0.6% this year, which is much better than it predicted last fall, when it predicted that the economy would fall into recession and contract by 1.4%.
However, it cut its growth forecast to 0.7% in 2024 and 1.4% in 2025 – down from its March forecast of 1.8% and 2.5%.
“The economy has proven more resilient to the shocks of the pandemic and the energy crisis than we expected. But inflation has also been more stable and interest rates are higher than expected.” [forecast] In March,” she said.
The Office for Budget Responsibility warned that inflation – currently at 4.6% – will only fall to 2.8% by the end of 2024, before reaching the Bank of England’s target of 2% in 2025.
It previously expected inflation to reach 0.9% next year, and 0.1% the following year.
She said UK living standards, measured by real household disposable income, were expected to be 3.5% lower in 2024-25 than before the pandemic, before returning to normal after several years.
“Although this represents half the peak-to-trough decline we expected in March, it still represents the largest decline in real living standards since the Office of National Statistics records began in the 1950s,” the OBR said.
The economy is suffering from a combination of high inflation, high interest rates, and weak consumer demand, which is affecting growth.
The Bank of England has raised interest rates 14 times since December 2021 to address spikes in prices, leaving them at 5.25% – the highest level in 15 years – at its last two meetings.
The idea is that this makes it more expensive to borrow money, weakening demand and slowing the rise in prices. But high interest rates also tend to make companies less likely to invest, which can impact the economy.
Although it led to higher interest rates for savers, it also led to higher mortgage rates, which put pressure on families.
This has affected property prices, which the Office for Budget Responsibility said will fall by around 4.7% in 2024.