- By Faisal Islam
- Economics editor
Image source, Getty Images
So far 2023 has seen some false dawns for the UK economy. The next few weeks’ data are critical.
Recession has been avoided but growth has bumped along the bottom.
And even as inflation falls from the double-digit levels of a year ago, it has proven more stubborn and sticky, and spread to the service sector.
The ONS’s recent huge revision of historical growth changes the picture of the immediate post-pandemic recovery, especially relative to other European countries.
But a broader reassessment of UK prospects may have to wait for news in the coming weeks.
Data released in September could show whether the crises of the past three years are being put firmly behind us.
Expectations within government are for the rollercoaster ride to continue for the next few weeks at least.
Unemployment might tick up again when new figures are released on Tuesday. However, the UK should finally return to a situation where earnings are growing by more than the rise in the cost of living too.
The economy (GDP) could also have shrunk a little in July – we’ll find out on Wednesday.
Rising fuel prices in August are likely to lead to a blip in the latest inflation numbers, released the following Wednesday, according to both Chancellor Jeremy Hunt and Bank of England governor Andrew Bailey.
All of this will feed into the Bank of England’s interest rate decision in a fortnight.
A rate rise had been expected, but recent hints have suggested the Bank may prefer to keep rates at current levels for longer.
Against this backdrop, the Office for Budget Responsibility (OBR) is plugging the latest data into its forecasts to be published in November, alongside the Autumn Statement.
On the face of it, higher wages are pushing up the tax take, meaning that this year’s borrowing numbers are coming in less than originally forecast.
However, there is more red ink pouring into the projections. At the Budget forecast in March, the peak in Bank of England rates was expected to be 4.3%. It is already 5.25%.
Ten-year UK borrowing rates were forecast to be an average of 3.6% in March, and they reached 4.8% last month.
The OBR already stated at the Budget that a one percentage point rise in borrowing costs would increase borrowing by £20bn in 2027-28, “wiping out headroom” in its forecast.
When the OBR points out that the Treasury is not on course to meet its self-imposed constraints on borrowing, that can result in pressure for tax rises or spending cuts.
Right now the political conversation is about the opposite – pre-election tax cuts, or more spending on, for example, school repairs.
For the chancellor, this autumn should help settle Britain on a stable, steady economic trajectory.
It will not be spectacular, but it will be a world away from last year’s shambles under his predecessor.
Inflation should continue to fall, down to 3% in a year’s time. The UK will stay in a respectable middle lane of growth in the major G7 economies.
The Treasury’s main medium-term policy focus will be acknowledging and trying to deal with the UK’s relatively poor record on business investment.
The Budget contained a suite of measures designed to help ease the labour supply problem.
The Autumn Statement will be about this business investment challenge. The Treasury thinks it explains a quarter of the UK’s productivity underperformance with other major economies.
The prize, if the UK was as productive as Germany, for example, would be an increase in GDP per head of £6,000.
But households are very much not out of the woods.
Even a declining headline rate of inflation, and rising average earnings, will not mask increasing pain as rising interest rates hit homeowners and renters.
The ONS consumer habits survey shows the bulk of people still spending more than usual on food shopping, buying less, and noticing less variety on the shelves.
Supermarkets notice hundreds of thousands of home meals, replacing eating out.
Banks notice mortgage holders used to the priciest of supermarkets switching to discount retailers.
By the end of the month the Bank of England could give a definitive steer that interest rates have peaked at 5.5%, albeit at the cost of their staying at such a level for the next year or so.
Industry is confident that high stocks of gas, and the ability to reduce demand, mean the whole of Europe should be resilient to any further energy market disruptions.
But the combination of some further stoppage in gas tanker trade and a very cold winter still has the capacity to create a nasty inflationary surprise in the new year.
A path to a more normal economic situation could emerge soon. The data about to be released should give some big clues.
