A watchdog has said the economy is already in recession - and warned it is set to shrink further next year due to soaring inflation. The Office for Budget Responsibility (OBR) also said in its forecast that government debt is set to rise £400 billion higher than previously expected.
It forecast the UK economy will be shrink by 2% in total over a lengthy recession which started earlier this year.The official forecaster downgraded previous projections that the economy would actually grow by 1.8% in 2023 to a fall of 1.4% for the year.
It comes as the Chancellor Jeremy Hunt confirmed in his autumn statement that new spending reductions and tax plans are intended to secure an extra £55 billion to help address the UK’s fiscal gap.
The gap is the extra money needed by the government in order to meet self-imposed targets to bring down the size of state debt relative to national income.
The announcement comes a day after inflation rocketed to a 41-year-high of 11.1% in October due to surges in the cost of energy and food. But what is the OBR, what is its forecast and what did it say about inflation and house prices? Here’s what you need to know.
What is the OBR?
The Office for Budget Responsibility is a fiscal watchdog. It was created in 2010 to provide independent analysis and forecasts of the UK’s public finances. Three members of the Budget Responsibility Committee , who are appointed by the Chancellor following a hearing at the Treasury Select Committee, lead the OBR.
Among their responsibilites are the judgements reached in the body’s forecasts. The three members arethe chairman, Richard Hughes, along with Professor David Miles CBE and Andy King.
What is the OBR’s forecast?
The OBR’s latest forecasts have been long awaited after the official forecasting body was not used during the September mini-budget, led by former chancellor Kwasi Kwarteng.
Economists partially linked the shock to the pound and bond yields following the mini-budget announcement to a lack of visibility on the impact of the previous government’s fiscal plan.The OBR said squeezed incomes, higher interest rates and tumbling house prices – are all set to contribute to a recession lasting “just over a year”.
The official forecaster downgraded previous projections that the economy would actually grow by 1.8% in 2023 to a fall of 1.4% for the year. Growth expectations for the following year were also downgraded in the face of continued inflationary pressure. It has, however, slightly upgraded the total economic growth expected this year to 4.2% from 3.8% in the March statement.
What did it say about inflation?
The OBR predicted that inflation will hit an average rate of 9.1% this year and 7.4% in 2023. Previously, forecasts had indicated inflation of 4% next year.
The Bank of England has repeatedly hiked interest rates during this year in an effort to drag down on inflation, with rates jumping to 3% earlier this month.
The OBR said higher interest rates has had a significant impact on government debt, which it said is now expected to be £400 billion higher – roughly 18% of the size of UK GDP – in 2026-27 than it forecast in March.
Rate increases means that cost of servicing government debt will double to over £120 million, which the OBR said will make public finances “more vulnerable to future shocks”. The cost of servicing this debt will be the highest proportion since following the second world war.
Unemployment is also expected to jump over the next two years, according to the forecasts. The rate of unemployment is set to lift from 3.6% to 4.9% in the third quarter of 2024. This would mean a 505,000 increase in unemployed individuals from 1.2 million present to a peak of 1.7 million.
In his autumn statement, Chancellor Jeremy Hunt said the forecasts “confirm that our actions today help inflation to fall sharply from the middle of next year. They also judge that the UK, like other countries, is now in recession,” he added.
What about house prices?
The OBR forecast says house prices are expected to fall by 9.0 per cent between the fourth quarter of 2022 and the third quarter of 2024. This it states will be “largely driven by significantly higher mortgage rates as well as the wider economic downturn”.
Meanwhile it says average interest rates on the stock of outstanding mortgages is set to peak at 5.0 % in the second half of 2024 - the highest since 2008. This figure is 1.8 percentage points above the peak in its March forecast. It also says that as around 83% of mortgages are fixed rate it will take time to feed through to the wider market.
Its economic forecast reveals house prices are expected to be up 10.7% annually by the end of this year but to then drop by 1.2% in 2023 and 5.7% in 2024. The OBR forecasts prices will be up by 1.2% in 2025, by 3% in 2026 and by 3.5% in 2027.