UK economy growth forecasts slashed for next two years

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The UK economy will grow much more slowly than expected in the next two years as inflation takes longer to fall, the government’s forecaster says.

The Office for Budget Responsibility (OBR) forecasts indicate that UK living standards are not anticipated to recover to pre-pandemic levels until 2027-28, as disclosed in the Autumn Statement by the Chancellor. Despite tax cuts and increased benefits announced, the OBR, an independent body, projects a 0.6% growth in the UK economy for this year, an improvement from previous expectations. However, growth outlooks for 2024 and 2025 were revised downward to 0.7% and 1.4%, respectively. The OBR cites the economy’s resilience to pandemic and energy crisis shocks but highlights higher inflation and interest rates than initially forecasted.

The OBR warns that the current inflation rate of 4.6% is expected to decline to 2.8% by the end of 2024, reaching the Bank of England’s 2% target in 2025. While inflation was previously anticipated to surpass the target next year, the new projections reflect persistent inflation challenges. Real disposable income for UK households is expected to be 3.5% lower in 2024-25 than pre-pandemic levels, representing the most significant reduction in living standards since the 1950s, although less severe than initially predicted.

The UK economy grapples with challenges such as high inflation, rising interest rates, and subdued consumer demand, impacting growth. In contrast to the OBR’s outlook, the Bank of England’s recent forecasts indicate minimal growth in 2024 and 2025. The central bank has raised interest rates 14 times since December 2021 to address soaring prices, reaching a 15-year high of 5.25%. While this aims to curb inflation, it may dampen business investment and impact households, with property prices expected to fall by approximately 4.7% in 2024.

During the Autumn Statement, Chancellor Jeremy Hunt acknowledged the UK’s faster growth compared to the eurozone but stressed the need for improved productivity. Proposals to remove planning red tape, assist entrepreneurs in raising capital, and reduce business taxes were presented to enhance productivity. Despite increased government borrowing and debt due to rising interest rates, the Chancellor expects lower borrowing and debt levels in 2024 and 2025, attributing this improvement to higher tax receipts and disciplined public spending.

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