- The UK economy is expected to shrink but avoid recession this year
- The Spring Budget’s growth headlines need to be put in context
The following facts were revealed by the Spring Budget:
- The UK economy is set to avoid a recession this year
- The government is on track to meet its target of growing the economy
But confusingly, so too were these:
- The UK economy will experience negative GDP growth – a 0.2 per cent contraction – in 2023
- The UK faces a ‘lost decade’ for living standards
To say the picture is muddled would be putting it mildly. Is the government really delivering economic growth?
UK growth in 2023
On the plus side, the outlook for growth is certainly better than it looked in autumn. The Office for Budget Responsibility (OBR) expects GDP to fall by just a quarter of the 2.1 per cent forecast in November, thanks to household savings buffers and accelerated business investment. But it doesn’t take a statistician to note that this will still leave the UK economy experiencing negative growth this year.
At first glance, it is hard to square this with the claim that the UK economy will dodge recession. The OBR expects the UK economy to contract by 0.2 per cent over the course of the year: shrinking by 0.4 per cent in Q1, before flatlining in Q2 and growing again from Q3. Because an ‘official recession’ is defined by two consecutive quarters of negative growth, we will be spared on a technicality.
This performance does not look impressive in an international context. The OECD’s latest forecasts agree that the UK economy will shrink by 0.2 per cent next year, a growth rate undershot only by Russia (see chart). The situation elsewhere looks considerably brighter: global growth is expected to average 2.6 per cent as declining energy prices contribute to a modest improvement in the global outlook for 2023.
Growing the economy?
Hunt billed the Spring Budget a ‘Budget for growth‘, and announced a number of longer-term measures designed to boost the supply-side of the economy, including childcare and pensions reforms.
The OBR thinks that Hunt’s policies will increase workforce participation and lead to higher GDP over the medium term as a result. The watchdog now expects the UK economy to grow by 1.8 per cent in 2024, 2.5 per cent in 2025 and around 1.75 per cent further ahead. And thanks to these more optimistic forecasts, Hunt announced that the government is on track to meet its target of “growing the economy”.
Although this is technically true, it is perhaps a low bar. Following the Budget, economists at the Resolution Foundation said that “the OBR’s forecast should not be taken as a sign of strong growth returning to the UK economy”, noting that economic growth over the current parliament is on track to be the weakest since Margaret Thatcher’s first term. Economists at the think tank calculate that this will leave 2024-25 GDP per person around £2,300 less than we expected before Covid hit.
The outlook for real disposable household income (a common measure of real living standards) is even worse. The OBR expects this to fall by 5.7 per cent between 2022 and 2024 – the largest drop since records began. According to the watchdog, the decline will be driven by the rising price of energy and imported goods, which will see inflation outpace nominal wage growth.
Paul Johnson, director of the Institute for Fiscal Studies think tank, pointed out this juxtaposition, noting that “the OBR may be relatively optimistic about the medium term, but it still thinks these will be the worst two years on record for household incomes”. He added that real household disposable incomes are expected to be no higher in 2027 than they were in 2019, meaning “a lost decade for living standards”.
In short, the picture for UK economic growth is decidedly mixed. Details – and context – matter.
