National Institute UK Economic Outlook Summer 2023

Twelve-month Consumer Price Index (CPI) inflation fell to 7.9 per cent in June, down from 8.7 per cent in May, and we expect it to fall further in July, driven by the reduction in the OfGEM price cap. The June number marks the lowest rate of headline inflation since March 2022, though it was still higher than we were anticipating back in February. We now expect CPI inflation to fall to 5.2 per cent by the end of 2023 and to 3.9 per cent by the end of 2024, as the effects of the monetary tightening over the past year start to take effect. With Core Inflation at 6.9 per cent, and other underlying inflation measures remaining high, we see upside risks to our inflation forecast. Cumulative monetary policy action over the past year – needed to tackle this high and persistent inflation – has tightened financial conditions. Our forecast is conditioned on the Bank Rate peaking at 5.50 per cent. We suggest that the MPC may wish to make clear in its communication that, as monetary policy is forward looking, it has done enough to get in front of inflation, as it sets out its path towards target. Failing to do so risks further adverse market reaction. The fall in the economic inactivity rate is an encouraging sign for the labour market, but the number of long-term sick remains high. Overall, the labour market has begun to loosen, with an uptick in unemployment and falls in vacancies, but remains tight. We expect the loosening to continue with the unemployment rate reaching 4.7 per cent in 2024 and peaking at 5.1 per cent, its 'natural rate', by 2026. We expect wage growth to remain above 6 per cent in 2023 and 2024, which may add to wage growth momentum and potentially inflationary pressures. Real personal disposable income, consumption and GDP all remain below their pre-Covid peaks and the outlook for GDP growth remains subdued, consistent with the longer-term trend of low economic growth in the United Kingdom. Specifically, we expect GDP growth in this year and next of 0.4 and 0.3 per cent, respectively. With no recession in our forecast, the MPC may achieve a 'soft-landing' based on our forecast outturn. That said, the risks to output are firmly on the downside and there is a greater than 50 per cent chance that annual GDP growth in 2024 will be negative. Public sector net debt (PSND) was 100.8 per cent of GDP in June. Surpassing the 100 per cent of GDP mark represents a milestone moment, albeit one that was expected. This figure is 1.5 per cent of GDP below the trajectory outlined in the Office for Budget Responsibility's (OBR's) March forecast, due to lower cash debt and higher GDP outturn. However, higher interest rates and inflation have increased government interest payments to 3.8 per cent of GDP in 2022-23 and raised potential QT-related cumulative net losses. The OBR released its Fiscal Risks and Sustainability Report, examining the challenges that inactivity and health, energy, and high debt pose to public finances. NIESR has been arguing for some time now that the United Kingdom needs a new fiscal framework that can provide enough flexibility and competence to respond to economic shocks while ensuring credibility is maintained and fiscal policy works for all (Chadha et al. 2021).