After the Spring Statement (or a Budget), the Office for Budgetary Responsibility (OBR) puts out its Economic and Fiscal Outlook, which sets out how the economy is doing and forecasts what might be coming.
Here's what they've had to say...
Inflation
The OBR is predicting inflation will hit a 40-year high by the end of this year. The current prediction is for the Consumer Prices Index (CPI) to be rising by 8.7% by the last quarter of 2022. That would be the fastest increase since April to June 1982. The OBR is predicting this based on energy prices rising by 40%, or an average of £830, from October (they’re already set to go up 54% in April).
That would take average bills from £1,277 last October and £1,971 this April to nearly £2,800. That’s a 120% rise in a year. According to figures published by the Office for National Statistics this morning, CPI rose by 6.2% in the 12 months to February 2022. That was up from 5.5% in January.
Disposable incomes
This coming year looks set to see the biggest hit to living standards since at least the 50s. Real household disposable incomes per person fall by 2.2% in 2022/23, the largest fall in a single financial year since ONS records began in 1956-/57 Household disposable income is how much money is available for spending or saving after things like taxes and benefits.
The OBR thinks it's going to fall that much because, while the Government council tax and energy bill help boosts most households’ incomes by £350 in 2022-23, that’s offsetting around half the £700 rise in energy bills taking effect in April. A similar thing will happen later in the year, as the temporary 5p cut in fuel duty and permanent increase in the National Insurance threshold announced only partly offset the further £830 increase in the energy price cap that the OBR expects in October.
Wages
Higher inflation and fewer workers might mean pressure for employers to pay higher wages. The OBR now expects earnings growth of 5.3% in 2022, compared to the 3.9% it forecast in October. The number of vacancies has risen to a record level of 1.3 million. This may be because there are fewer people participating in the labour market.
The Labour Force Survey (LFS) puts the number in employment at 448,000 below its level in the fourth quarter of 2019, largely due to lower participation and significantly lower self-employment. Overall, the OBR thinks the shortfall in the labour force is close to 1.2 million based on the gap between pre-pandemic trends and current participation.
Fewer people are working or available for work due to a variety of reasons. There’s more students, likely due to fewer opportunities for young people to enter the job market during the pandemic, disruption to A-levels that raised average grades, and fewer students with part-time jobs.
There has also been a rise in the number of people who are inactive as they’re long-term sick - a recent Chartered Institute of Personnel and Development study suggests that long Covid is a major cause of long term job absence. Older people who left the workforce during the pandemic aren’t planning to return, with an increase in numbers taking their pension early.
Mortgages
If you’re on a variable rate mortgage, you may see your interest rates rise further. So far the Bank of England has raised the rate from a historic low of 0.1% to 0.25% in December, then to 0.5% in February, and then to 0.75% in March. The OBR is now predicting the bank rate will rise gradually to 1.9% over the next 18 months. However, according to the OBR, the bank rate remains historically low and far below the average of around 5% in the decade before the global financial crisis.
Savings
A rise in the bank rate might, however, be some limited good news for savers. While savings rates aren’t keeping pace with inflation, an increase in the bank rate might see them rise a bit. However, the cost of living crisis means the amount we put away might be set to fall. The OBR expects the proportion of household income invested in savings to continue to fall in 2022 and reach a record low of 2.8 per cent by the start of 2023.
This will happen as households try to maintain their consumption in the face of falling real incomes. For some households that will mean eating into the savings built up during the pandemic, while others take on more debt.
During the early part of the pandemic, the household savings rate reached a record high of nearly 23% of disposable income as restrictions limited spending and government policy supported household incomes. That fell as restrictions eased, but households had saved around £230billion more than in the equivalent period before the pandemic, of which around £185bn is in easily accessible accounts.
