The drop in real household disposable income per capita, a measure of living standards, is less than the seven per cent fall expected in November, but will still represent the largest two-year fall since records began in the 1950s, according to The Office for Budgetary Responsibility (OBR).
The Economic and Fiscal Outlook for March said the fall in real household disposable income (RHDI) largely reflects the rising prices of energy and goods imports.
It said: “Real living standards are still 0.4 per cent lower than their pre-pandemic levels in 2027-28. But they are 0.6 per cent higher than we forecast in November thanks to lower market expectations for medium-term gas prices and the upward revision to potential output.”
When the OBR closed its forecast on 8 February, it foresaw the terminal Bank of England interest rate at 4.25 per cent later this year, compared to five per cent, as had been assumed in November.
Markets predicts base rate to peak at 4.3 per cent
The economy narrowly avoided a technical recession in the second half of 2022 as real GDP fell by 0.2 per cent in the third quarter, but was flat in the fourth quarter.
It said: “Growth returns in the second half of 2023 due to the bounce back in activity from the (Coronation) bank holiday and as household energy bills fall. In 2023 as a whole, real GDP falls 0.2 per cent, with private consumption, business investment and net trade all dragging on growth, offset by growth in government consumption.”
GDP growth picks up to 1.8 per cent in 2024 and 2.5 per cent in 2025 as interest rates start to fall and drops in energy and other tradeable goods prices take inflation below the two per cent target.
Markets expect bank rate to peak at 4.3 per cent later this year – before falling back to three per cent by the end of the forecast period in 2028.
