UK Economic Outlook Spring 2023

Hailey Low

10 years: Macroeconomist

In this video, Hailey covers the economic outlook of the UK in spring 2023 as per the NIESR’s UK Economic Outlook. Hailey explains the causes, impacts and risks posed by this period of high inflation on the economy as a whole. She also covers the measures taken by the Bank of England and the Government as a response to inflation.

Macroeconomics

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UK Economic Outlook Spring 2023

13 mins 29 secs

Key learning objectives:

Understand the economic situation of the UK in spring 2023
Understand the causes and the impacts of inflation in the UK
Understand how the Bank of England has responded to the inflation
Understand fiscal policy measures aimed to address the economic situation

Overview:

Towards the end of 2022, the UK's economy was forecasted to face a long recession in 2023, however it seems to have averted that. Although that is positive news which shows signs of improvement, the risks of high embedded inflation, a tight labour market, and sluggish growth remain. Policymakers must address the underlying causes of economic challenges and implement targeted strategies to navigate through them effectively. Additionally, fiscal policies should prioritise improving the welfare of households rather than solely meeting arbitrary fiscal targets.

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Summary

What is the current economic situation in the UK?

The UK faced the possibility of its longest recession since 2008, but recent data from the NIESR’s economic outlook for spring 2023 suggests it may have dodged the recession bullet. GDP still remains close to 0 and grew by 0.1% in the first quarter of 2023, and it is expected to grow by 0.3% in the second quarter. This sluggish growth is expected to be the norm through 2024 as well.

What is the state of inflation in the UK and what are its impacts?

In May 2023, inflation in the UK was at 8.7%.This was exacerbated by a supply shortage and chronic investment deficit. In parallel, food price inflation has been a major driver, reaching a concerning 19.1%, and core CPI (excluding energy, food, alcohol, and tobacco) rose by 6.8%, the highest rate since March 1992.

How is the Bank of England responding to inflation?

Inflation has remained above the Bank of England's target of 2% for 21 consecutive months, and there are concerns that it may become more persistent and embedded. To combat this, the Bank of England's Monetary Policy Committee (MPC) has raised interest rates for the 12th consecutive time, reaching 4.5% in May 2023. This is the highest since the 2008 global financial crisis (GFC). The MPC is expected to continue raising rates in order to bring inflation back to their target of 2%. However it should be kept in mind that there are risks associated with the evolution of monetary policy, on both the upside and downside depending on how the easing or tightening of rates occurs.

How is the UK government addressing economic challenges through fiscal policy?

The Chancellor's Spring Budget in 2023 focused on stimulating growth and addressing labour supply shortages and investment deficits. Policies aimed at boosting business investment were introduced such as 100% capital allowance for qualifying investments in machinery and equipment for example. But these only provide short-term solutions as they taper off long-term. Despite better-than-expected GDP data, rising interest rates have affected government interest spending and worsened public finances.

What is the state of the labour market in the UK?

The UK's labour market has been a cause for concern due to the marked increase in economic inactivity, leading to a workforce participation rate that remains below pre-pandemic levels. More workers over the age of 60 are expected to return to the labour force, but there are worries about the long-term impact of demographic changes and labour market tightness. As a result of high inflation, nominal wage growth remains high, but real wages are declining.

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Hailey Low

Hailey Low, an associate economist at the National Institute of Economic and Social Research, specialises in macroeconomic modelling and forecasting. Her research interests include macroeconomic performance and policies, monetary policies, international trade and development, and the interplay between the financial and economic worlds. Prior to joining NIESR, she earned a master's degree in data analytics in economics and finance from the University of Glasgow and held various analyst and research roles.

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