UK economy set to shrink but avoid official recessionon March 15, 2023 at 4:13 pm

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Analysts warned that the UK was “not out of the woods yet” with a big drop in living standards predicted.

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The UK economy is expected to shrink this year but narrowly avoid an official recession in a better-than-expected performance for the country.

Inflation – the rate at which prices rise – is also expected to more than halve this year dropping to 2.7%.

However, even with the improved forecast for economic prospects, the government’s forecaster warned of a big drop in living standards.

Analysts warned that the UK was “not out of the woods yet”.

Independent research group The Institute for Fiscal Studies said the economic picture hadn’t changed “enormously since the autumn”.

“The Office for Budget Responsibility (OBR) expects the economy to grow a bit faster in the short-term, and a bit slower in the medium-term, combining to produce an economy 0.6% larger in real-terms in 2027-28 than under the autumn forecast,” director Paul Johnson said.

Chancellor Jeremy Hunt said the prediction from its forecaster was “proving the doubters wrong”.

But Labour leader Sir Keir Starmer accused the government of being “out of touch” and putting the country “on a path of managed decline”, saying it was “dressing up stagnation as stability”.

But while the UK will escape the usual definition of a recession, which is two consecutive three-month periods of decline, once inflation is taken into account incomes are expected to fall by 5.7% – the largest two-year fall since records began in the mid-1950s.

The OBR warned living standards would not recover to pre-pandemic levels until at least 2027. 

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How can we avoid a recession and still shrink?

Analysis box by Robert Cuffe, Head of statistics

The chancellor has announced that the economy will avoid a “technical recession” this year, but that doesn’t mean we’re out of the woods.

The size of the economy – the value of everything we make and produce this year – is set to fall by about 0.2% according to the chancellor’s figures.

It becomes a “technical recession” if the economy shrinks for two seasons (three-month periods) in a row. So it’s possible to avoid the technical definition even if the economy is doing badly if it shrinks in the spring and autumn but rises in the summer.

A forecast of a 0.2% shrinkage may be better than we thought last autumn (shrinking by 1.4%) but it’s hardly anyone’s definition of doing well.

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The chancellor also said the UK was on track to meet the government’s self-imposed fiscal rules.

According to these rules, government debt must be falling as a percentage of economic output in five years’ time and the budget deficit must be below 3% of gross domestic product over the same time period.

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