UK Economic Outlook Spring 2023

The UK faced the possibility of its longest recession since 2008, but recent data from the NIESR’s economic outlook for spring 2023 suggests it may have dodged the recession bullet. GDP still remains close to 0 and grew by 0.1% in the first quarter of 2023, and it is expected to grow by 0.3% in the second quarter. This sluggish growth is expected to be the norm through 2024 as well.

In May 2023, inflation in the UK was at 8.7%.This was exacerbated by a supply shortage and chronic investment deficit. In parallel, food price inflation has been a major driver, reaching a concerning 19.1%, and core CPI (excluding energy, food, alcohol, and tobacco) rose by 6.8%, the highest rate since March 1992.

 Inflation has remained above the Bank of England's target of 2% for 21 consecutive months, and there are concerns that it may become more persistent and embedded. To combat this, the Bank of England's Monetary Policy Committee (MPC) has raised interest rates for the 12th consecutive time, reaching 4.5% in May 2023. This is the highest since the 2008 global financial crisis (GFC). The MPC is expected to continue raising rates in order to bring inflation back to their target of 2%. However it should be kept in mind that there are risks associated with the evolution of monetary policy, on both the upside and downside depending on how the easing or tightening of rates occurs. 

The Chancellor's Spring Budget in 2023 focused on stimulating growth and addressing labour supply shortages and investment deficits. Policies aimed at boosting business investment were introduced such as 100% capital allowance for qualifying investments in machinery and equipment for example. But these only provide short-term solutions as they taper off long-term. Despite better-than-expected GDP data, rising interest rates have affected government interest spending and worsened public finances.

The UK's labour market has been a cause for concern due to the marked increase in economic inactivity, leading to a workforce participation rate that remains below pre-pandemic levels. More workers over the age of 60 are expected to return to the labour force, but there are worries about the long-term impact of demographic changes and labour market tightness. As a result of high inflation, nominal wage growth remains high, but real wages are declining.