The economy is now forecast to grow by 0.3 per cent in 2023, a brighter outlook from the OECD than its March prediction that the economy could head into a 0.2 per cent downturn. GDP growth is expected to “improve moderately” to on per cent, instead of the 0.9 per cent interim forecast made in Q1.
Government spending on initiatives such as the energy support measures which contributed to growth in the second half of 2022 will carry over to the first quarters of 2023. The government’s spending will continue to “prop up” the economy before private spending becomes stronger as wholesale gas prices fall and global economic conditions improve.
Inflation heading for target by 2024
The OECD predicts that inflation, currently standing at 8.7 per cent, will slow following the decline in energy prices and move down close to the two per cent target by the end of 2024.
Core inflation is expected to be more persistent due to strong inflation in the services sector while unemployment is forecast to rise to 4.5 per cent in 2024.
Speaking to the Financial Times, the new chief economist of the OECD Clare Lombardelli said the UK had a “particular issue about the labour market”. She said the size of the workforce had fallen after the pandemic, raising pressure on companies to pay people more.
The government hopes that its free childcare initiative will encourage more parents back into work.
As inflation remained higher than expected after the latest Consumer Price Index figures showed a rise of 8.7 per cent in the 12 months to April, financial markets and economists have revised up their peak base rate predictions.
First base rate cut expected next year
Deutsche Bank now expects the base rate to reach 5.25 per cent by in the latter part of Q3 2023 and does not think the first base rate cut will appear until May 2024.
In its macro outlook, Higher for Longer, the bank wrote: “Why the rise in rate expectations? Simply, stubborn inflation and still very elevated wage growth (particularly in the private sector). We also think there is a real risk around price persistence later this year, even as inflation slows further from its multi-decade highs.”
Base rate predictions divided
A poll of 50 economists carried out by news agency Reuters found that the middle ground prediction for the direction of the base rate was a 25 basis point increase on June 23 when the Bank next meets taking the rate to 4.75 per cent. A peak of five per cent is forecast by the end of quarter three.
Capital Economics agrees that June will usher in a rise, driving the rate from 4.5 per cent to 4.75 per cent but it expects the base rate to top out at 5.25 per cent in September. The financial markets are going a step further and pricing in a peak of 5.5 per cent, fuelling the rapid withdrawal and repricing of mortgage deals.
Economists EY Item Club say rising mortgage rates are the “main headwind facing the housing market”. Around 2.5m more homeowners will be moving onto a higher mortgage rate this year as fixed rates expire. The recent higher than expected inflation data has pushed gilt yields towards levels not seen since last autumn’s mini budget, says EY, prompting some lenders to withdraw and reprice fixed rates.
It added: “The EY Item Club thinks it is very likely the Bank of England will raise interest rates again this month, and possibly again later in the summer. As a result, we think house prices are likely to continue drifting down, although avoiding a major correction.”
