The UK economy will shrink this year, but not fall into a technical recession, chancellor Jeremy Hunt has said in his budget statement to the house of commons this afternoon (March 8).
Hunt was referencing figures from the Office for Budget Responsibility, the government’s budget watchdog, which now expects growth to be negative to the tune of 0.2 per cent in 2023, a revision from its previous expectation that the economy would shrink by 1.4 per cent this year.
Despite the forecast being for the economy to shrink this year, Hunt can claim the country will avoid a “technical” recession, because a technical recession is defined as two consecutive quarters of negative GDP growth.
There are four quarters in a year, and the economy could shrink in two of them, but as long as they aren’t consecutive, then a technical recession is avoided.
There was better news for the economy in terms of inflation, with the OBR anticipating that will drop to 2.7 per cent by end of this year, albeit that is still above the Bank of England’s official target of 2 per cent.
Future growth expectations have also been revised upwards, with 1.8 per cent growth forecast next year, up from the previous 1.3 per cent, and 2.5 per cent growth in 2025.
Hunt also said he expects debt as a percentage of GDP to continue to fall in the years ahead, given that the GDP number is expected to fall this year, that implies debt must fall even further.
As part of the budget announcement, Hunt announced around £69bn worth of subsidies and supports for the economy in areas such as energy prices and childcare.
Mike Coop, European chief investment officer at Morningstar said: “Since the Chancellor’s first Budget, we find ourselves in a much more positive environment. Nevertheless, the UK’s road to recovery is still a narrow one owing to the twin deficits. However, for investors the signs are positive. Markets are showing renewed vitality as the BoE and the government look to galvanise this restoration.
He added “The measures announced are a mix of pro-growth (tax incentives to stimulate investment), lower inflation (incentivising more back into work via pension tax reforms and childcare) and gearing up for next election. It does not represent a material change in the outlook for growth inflation or interest rates in our view.”
The twin deficits are the current account deficit, ie Britain importing more than it exports, and the budget deficit, ie the government spending more than it earns.
Both have been long-term features of the UK economy, with the former typically funded by service sector economy activity and the latter funded by the bond market.
David.Thorpe@ft.com
