A report by the National Institute of Economic and Social Research (NIESR) said the average middle-income household would face a 13 per cent, or £4,000 hit, to their disposable income in the next financial year.
The think tank said the UK would avoid a “technical recession” but warned “it will certainly feel like a recession for many”.
The NIESR forecast comes ahead of official GDP figures, which are due on Friday.
A recession is when the economy shrinks for two consecutive quarters. Although NIESR predicts that the UK will avoid a recession, it estimated that the economy will grow by just 0.2 per cent this year, and one per cent in 2024.
Higher interest rates mean higher costs on lending for businesses, increasing the risk of lower business investment. NIESR said this may affect the longer-term growth and productivity prospects for the UK.
NIESR’s predictions are more upbeat than the recent forecasts by the Bank of England, the International Monetary Fund (IMF) and the EY Independent Treasury Economic Model (Item) Club.
The IMF released a report just over a week ago that predicted the UK would be the worst-performing developed economy in 2023, with output falling 0.6 per cent, while the EY economic forecasting group said last month that it is expecting a 0.7 per cent contraction in UK GDP this year.
Inflation woes
NIESR said that inflation will continue to remain a concern for the 2023 outlook at both the macroeconomic and household level. It anticipates that inflation will still be above three per cent at the end of 2024 and will not reach the Bank of England’s two per cent target until the third quarter of 2025.
The think tank warned that one in four, around seven million, UK households will be unable to meet in full their planned energy and food bills from their post-tax income in 2023-24, up from around one in five in 2022-23.
It said that middle-income households will face a hit to their personal disposable income ranging from seven per cent to 13 per cent, reaching up to £4,000 in the financial year 2022-23.
Back to work for the over-50s
As personal savings are run down, and fewer workers can afford to retire early, the think tank anticipates that the participation rate for the working-age population will return to its pre-Covid level over the course of the next few years as workers in the 50 to 64 age group return to the labour force.
NIESR pointed out that the current monetary policy tightening cycle has been “aggressive” in terms of the pace and magnitude of rate hikes and will likely bear down on output and growth in 2024.
But it pointed out that the annual inflation rates we saw throughout the course of 2022 made this a necessity.
Economists at the think tank said the freezes in income tax thresholds will lower personal disposable income and the corporation tax rises will likely reduce investment in the economy.
