Chancellor Rishi Sunak revised down the UK’s GDP growth forecast for this year, citing the conflict in the Ukraine as the reason.
Speaking as part of his spring statement, the chancellor said the Office for Budget Responsibility (OBR), the independent forecasting agency of the government, has cited the particular uncertainty in the world right now as the reason why it is difficult to forecast the full impact of the Ukraine conflict on the economy, but has revised down its economic forecast to 3.8 per cent.
There is also no anticipation that the level of GDP growth will bounce back in 2023, as growth is expected to be almost half the rate of this year, at 1.8 per cent.
As lower inflation would be expected to boost GDP growth, the implication of the chancellor’s statement is that inflation will be high in 2023 as well.
The eye catching part of the statement from the chancellor from an economic point of view, came with the announcement that he now expects inflation to average 7.4 per cent this year.
That figure can be seen in the context of the inflation print for February coming in at 6.2 per cent, itself a 30-year high.
Sunak said that 7.4 per cent is the average inflation rate for this year, implying that in at least several of the months ahead, the inflation number will be higher than that.
The chancellor said that the OBR has not yet fully factored in the economic consequences of the Ukraine war on the UK economy, and, in consequence, has decided to leave himself some “headroom”, in terms of public spending.
He said the cost of UK government borrowing, ie, the interest rate being paid on debt, has risen four fold in the past year, to what he says in an all time high.
Gerard Lyons, chief economic strategist at Netwealth, said: "Much as expected the OBR's new economic forecasts confirm a stagflation hit to the economy - growth almost halved and inflation almost doubled this year compared with what the OBR said last October. 2022 growth now 3.8 per cent vs 6.5 per cent expected last October; inflation now 7.4 per cent vs 4 per cent last October.