Britain’s stuttering economy will be stuck in the growth slow lane for the next three years as inflation and interest rates stay higher for longer than previously forecast.
Latest forecasts from the Government’s economic watchdog, the Office for Budget Responsibility (OBR), released to coincide with the Autumn Statement, show projections for GDP growth have been slashed out as far as 2027.
Although growth this year is expected to advance 0.6%, faster than the 0.2% expected at the time of the Budget in March, forecasts for subsequent years have been hacked back, although the OBR does not foresee any threat of a recession.
Next year will see GDP advance by a feeble 0.7%, compared with a projected 1.8% in March. The following year also has growth forecasts downgraded by 1.1%, from 2.5% to 1.1%.
By 2026 it has accelerated to 2%, little different to the 2.1% at the time of the Budget, and in 2027 the OBR expects a further 2% GDP boost.
The OBR said that the revisions to its forecasts meant “in our central forecast, the level of real GDP in 2027 is only 0.6 per cent higher than March.”
Its Economic and Fiscal Outlook report adds: “Squeezed real wages, higher interest rates, and unwinding government support all weigh on economic activity, opening up a moderate degree of spare capacity over the next three years.”
However, stronger than expected demand this year means that the inflation spike is expected to subside less quickly than previously hoped The OBR now warns that inflation is expected “to remain higher for longer, taking until the second quarter of 2025 to return to the 2 per cent target, more than a year later than forecast in March.”
As a result of the persistent inflation the Bank of England will only be able to lower interest rates slowly from their current level of 5.25, according to the OBR. It points out that “markets now expect Bank Rate to settle at 4 per cent by the end of the forecast, rather than fall to 3 per cent as we assumed in March.
Laith Khalaf, head of investment analysis at brokers AJ Bell, said: “There was undoubtedly some good news for workers in the Autumn Statement in the form of a meaningful National Insurance cut, but the economic and fiscal forecasts still make for pretty grim reading.
"In particular, although the Autumn Statement has lessened the tax burden a bit, it’s still expected to rise to a post-war high in five years’ time, at 37.7% of GDP. That’s on top of the bad news delivered by the Bank of England earlier this month that over half the pain of rising interest rates is still in the post.
“Fiscal drag is a powerful force, especially when tax thresholds are frozen in the face of an inflationary storm. As a result of this policy, four million more people will be paying income tax by 2029 and three million more will be paying higher rate tax.
"And though the government is happily cutting the rate of National Insurance for workers from January, we should also bear in mind that the threshold at which it starts being paid is now frozen until 2028, and so rising wages will push a greater proportion of people’s income into scope.
“Economic growth is also forecast to be thin on the ground going forward, with growth of just 0.7% next year, rising to 1.4% the year after. The budget watchdog is actually pretty upbeat compared to the Bank of England, which sees growth coming in at 0.1% next year and 0.2% the year after.
"It remains to be seen which set of predictions prove to be correct, if either. In this set of forecasts the OBR has integrated the significant revisions to previous economic growth made by the ONS a few months back. It does nothing to liberate economics from its reputation as the dismal science when its most respected contributors can’t get the past right, let alone the future."
Matthew Ryan, head of market strategy at financial services firm Ebury, said: “The OBR raised its 2023 GDP growth forecast to +0.6% from -0.2%, which is hardly a surprise given that economic data has largely surprised to the upside since the last set of projections in March. The growth forecasts for the next two years were, however, revised rather markedly lower to +0.7% and +1.4% respectively, suggesting that the period of economic hardship will likely linger for a little while yet.
“All in all, most of the policy tweaks announced, including the increases in the state pension and UC and disability benefits, were either fully expected or seen as having minimal impact on the economic outlook. This can explain the mild reaction in both equity markets and the pound this afternoon.”
