Analysts have downgraded their 2023 economic growth forecasts for the UK in the wake of the “mini-Budget”, with many warning of little improvement in the medium term.
Chancellor Kwasi Kwarteng said last month that the government wanted to “turn the vicious cycle of stagnation into a virtuous cycle of growth”.
But many analysts think the government’s fiscal package, which sent gilts and sterling tumbling, has piled a borrowing costs crisis on top of an existing living costs crisis.
The economy is expected to contract 0.3 per cent next year, according to Consensus Economics based on an average of leading forecasts — a significant fall from the 0.1 per cent expansion forecast in August.
Gaurav Ganguly, senior director of economic research at Moody’s Analytics, said the government’s “recent actions had made stagflation and a deep recession almost inevitable”.
At the same time, many economists see no improvement in the medium-term outlook, with predicted annual average growth fixed at 1.5 per cent, well below the chancellor’s target of 2.5 per cent.
In fact, Ganguly said there was a risk that medium-term growth “trends lower” as questions lingered “around the stability of the pound and the desirability of the UK as an investment location”.
Kallum Pickering, senior economist at Berenberg Bank, said more information on policies over deregulation was needed to make a full assessment.
However, he noted that without some supply-side reform the tax cuts “cannot raise UK potential growth in the future”. He expected a 1.5 per cent contraction in economic growth in 2023, reflecting a more pessimistic view than the consensus.
He added that while tax cuts would support demand, the “confidence shock” and “significant tightening in financial conditions” that followed the government’s announcements “will overwhelm any of their near-term effects”.
The mini-Budget “is a clear policy failure, and therefore the economy will pay a price for that”, Pickering said.
Economists from Berenberg, UBS, Goldman Sachs and HSBC are forecasting three quarters of economic contraction from the three months to September, followed by either weak growth or the economy flatlining until the end of next year.
This is despite the package of state energy support, which will freeze average household energy bills at £2,500 a year for two years.
Prime minister Liz Truss’s cancellation of the tax rate cut for the highest earners, which accounts for £2bn in the £45bn package of cuts, was only “a small part of the equation”, said Susannah Streeter, senior investment and markets analyst at asset manager Hargreaves Lansdown.
Markets are still pricing in that the Bank of England will raise interest rates to above 5.5 per cent by August 2023. This is a sharp increase on the current 2.25 per cent rate, and more than a full percentage point above what was previously expected.
Ross Walker, chief UK economist at NatWest Markets, warned that the hikes in the bank rate had barely fed through to the real economy. “This hit is coming and its force will increase,” he said.
Even if people are not immediately hit by rising rates they will probably be worried about what their mortgage payments will be in six months’ time or a year, said Martin Beck, chief economic adviser at the consultancy EY Item Club. This would cause households to “spend less and save more”.
Some analysts predict current conditions will lead to a recession at the end of next year, rather than this year.
Ganguly said the positive effects of the tax cuts “will have faded by this time next year” with the UK likely to slip into a deep recession lasting several quarters.
Streeter, noted that consumers face “severe cost-of-living headwinds” due to the higher price of imports brought about by the weaker pound.
These worries, she said, would be compounded by fears about rising housing costs, at a time when many would already be grappling with higher energy bills; “purse-tightening will continue”, she said.