Chancellor Jeremy Hunt has vowed to use the Budget on March 15th to set Britain on the “hard road” to becoming one of Europe’s richest countries. The focus is likely to be on tax breaks to encourage investment, measures to get people back to work, and to ease the cost-of-living crisis. But adherence to fiscal discipline means big tax cuts will have to wait.
With central banks around the world continuing monetary tightening to tackle persistent inflation, expectations for the Bank of England to follow suit are simmering. But our economic reality is more complicated than that. Inflationary pressures have been coming down recently and the labour market is slowly loosening. However, wage growth pressures are firm and activity data is indicating a recovery. It’s wait and watch for now. Similarly, the jury is out on whether the DUP will embrace The Windsor Framework and return to Stormont.
We got a good read of how the UK economy is performing last week. Unemployment is low but the labour market is loosening, price pressures are gradually abating and consumer appetite is diminishing. All reasons that might prompt the MPC to hit the brakes on its programme of rate hikes at its next meeting on 23 March. But there is no immediate respite for Britons; households are still feeling the pinch.
The big news last week was the UK narrowly avoiding a recession towards the end of 2022. But that’s not enough reason to celebrate. Businesses remain pessimistic, consumer confidence is at record lows, and policy is at its tightest in recent times. Even with energy prices set to retreat more quickly than previously, the squeeze is still being keenly felt. For now, most indicators suggests that conditions are going to get more difficult before the improvement comes.
It’s Bank of England decision time this week as the MPC will meet to set (and likely raise) Bank Rate. How are we placed currently? For one, the economic downturn is gathering steam. For another, businesses appear in no hurry to stop raising prices, even with energy prices coming down. But cost of living concerns remain entrenched. Difficult territory. And plenty for the Bank of England to ponder whether to bring its rate tightening cycle to an end.
Last year was tumultuous for the UK to say the least—from the cost-of-living crisis, to witnessing three PMs in a mere two months, to the end of the rule of its longest-reigning monarch, and rounding off the year with a recessionary threat clouding the outlook. And that was just at home. Globally, geopolitics loomed large in 2022, exerting a far greater influence and shaping the outlook in a way it hasn’t done in years. What does 2023 have in store?
It’s MPC week again. Although much of the turmoil that Bank of England had to grapple with in its November decision has now faded, it still faces a finely balanced decision. The UK has the worst growth outlook among the G7, its workforce is shrinking, buffeted by the impact of Long Covid, and inflation expectations have risen. While the festivities are masking some of this, fears over a post-Christmas slump are on the rise too.
Some mild respite for businesses as last week’s data suggests some easing of price pressures. Energy crisis concerns are also at their lowest since Feb’22 when the war in Ukraine began. But consumers remain cautious, staying away from taking more debt or running down savings. Too bad, for those lucky enough to have accumulated some Covid savings, they’d be of real benefit to the economy. Thankfully, holiday spending in the final weeks of the year should spur some gains.
The UK economy is already struggling for traction but prominent voices in the Bank of England indicate a little bit more tightening in rates is on the way. As the holiday season approaches, some seasonal improvements in spending and hiring are likely. But these should not be mistaken as signs of a recovery. That, unfortunately, is still a long way off. But the UK is not alone in its woes. Waning economic momentum and high inflation are firmly problems shared.
Last week UK became the only G7 country in which GDP fell in the third quarter, having never recovered to its pre-Covid peak. But there’s worse to come. Chancellor Hunt’s return to fiscal orthodoxy entails tax hikes and spending squeezes that will be delivered in the Autumn Statement this week. Tighter fiscal and monetary policy will continue to weigh on household spending. Hopefully there are measures on Thursday that help pave the way for a recovery.
