The UK is set to enter recession this year, but now the Bank of England has stated it will be “shorter” and “less severe” than previously predicted. As energy bills slowly start to fall, the economic downturn is now expected to last for only one year in comparison to the two year projection.
The Bank of England has warned however that the economy remains in a fragile state and interest rates will continue to rise to tackle inflation and the rising cost of living. Interest rates were raised to 4%, an increase of 0.5% in the last quarter, the highest rate in more than 14 years. In theory, higher interest rates will encourage people to spend less, which in turn will stop the price hikes.
The shortened recession does however mean that fewer people are likely to lose their jobs for the first time since before Covid-19. The number of people looking for work has also risen, with the office for national statistics recording 1.1 million job vacancies in the UK in Q3 last year, the highest number since 2001.
Inflation continues to be a problem despite the changes though, with price rises continuing resulting in the highest inflation rate for more than 40 years. Senior economists suggest that this number is over 5 times what it should be for a country of this size taking into account its capital and economic history.
Annual food inflation for example hit an all-time high of 16.8% at the end of 2022, with the prices of staples such as bread, milk, cheese, and eggs seeing the largest increases. The war in Ukraine and increased demands for oil and gas after the pandemic pushed prices up as resources became limited. Property owners have also been disproportionately affected, with the average mortgage owner paying £49 more a month than previously.
In a statement this week, Bank governor Andrew Bailey said that inflation is at its peak and will start to fall throughout 2023 but there are still “many big risks” the government and banks have to take to stabilise the economy. It is predicted by the end of 2023 inflation levels will be around 4%. The International Monetary Fund however has predicted in its annual report that the UK is set to be the only major global economy to shrink in 2023, expected to perform even worse than Russia.
Whilst the UK’s recession is set to be shorter than previously expected, millions of people and businesses will continue to struggle with the rising costs and inflation in the coming year. The Shadow Chancellor Rachel Reeves has hit back at the government’s economic policy measures, stating: “the reality is that under the Tories growth is on the floor, families are worse off, and we are stuck in the global slow lane.” The current forecast is that the UK economy will not recover to pre-covid levels until 2026.