Britain’s economy is headed for a period of sputtering growth just above the threshold of a recession, but for now even a hesitant pace of expansion is ringing alarm bells at the Bank of England.
The UK central bank is anxious to return double-digit inflation back to the 2% target and has estimated the economy can only grow at a dismal pace without adding to upward pressure on prices.
Governor Andrew Bailey and his colleagues signaled last week that the quickest series of rate rises in four decades may be near an end, but they remain on guard against signs that wages and prices will keep rising. A more resilient economy and a stronger-than-expected jobs market threaten to make the task more difficult.
Investors are still factoring in a strong chance the key rate, now 4.5%, hits 5% by the end of the summer.
Here are the key charts setting out the UK’s outlook:
While the BOE’s Monetary Policy Committee delivered its biggest ever upward revision in growth projections, officials still expect the UK expansion to trail the US and Eurozone.
The outlook is a sharp improvement from February’s forecast for a lengthy recession. But growth is expected to be extremely sluggish, slowing to 0.25% this year and only picking up to 0.75% in each of 2024 and 2025. At that pace, output won’t recover to pre-pandemic levels until the end of 2023 — almost four years after Covid first struck.
“It’s a very big upward revision, but the level of growth is still weak let’s be honest,” Bailey said last week. “This is still not a strong forecast. We still expect a degree of economic slack to emerge from the end of this year.”
Fresh GDP figures on Friday underscored Britain’s struggle to get growth going, putting the UK at the back of the Group of Seven nations.
Worryingly there were signs of the resilient British consumer struggling under the weight of higher borrowing costs and the cost-of-living crisis. Monthly data in March showed a 0.3% contraction, partly driven by weakness in consumer-facing services. It meant that the UK only eked out the smallest measure of growth in the first quarter.
Even that anemic recovery is a danger for Bailey.
While energy and food prices pushed inflation to double digits, it’s now domestic drivers, including a more resilient economy and tighter-than-expected labor market, that are elevating price pressures. The BOE expects the economy to be 2.25% bigger in mid-2026 than it thought in February, creating extra demand that could well keep a fire under prices.
For now, the BOE expects a rapid fall in inflation starting this month when figures for April are released. The current rate of 10.1% could drop to just over 5% by the fourth quarter — a rate the US is already below.
Bailey and Chief Economist Huw Pill have said they’re watching data for so-called second round inflationary effects, when a price surge in one part of the economy lead others to raise them too.
Bailey warned that these effects are unlikely to “go away as quickly as they appeared,” with the MPC focusing on wages and service sector prices for signs about how persistent the increases will be. So far, Bailey said the news has been “mixed.”
One dampener on inflation will be the slow but growing impact of higher rates on homeowners. The BOE believes only a third of the rate rises delivered so far have seeped through to impact mortgage holders. Many are set to feel the pain of higher borrowing costs when their fixed-rate deals expire.
UK households have moved to protect themselves by taking out longer-term mortgages, delaying the moment when they will have to re-fix the cost of their loans at a higher rate. The BOE estimates 1.3 million households will feel the pinch this year.
That and soaring inflation has delivered a squeeze on household spending power that may tighten in the next few months. That pain for consumers may well reduce the inflationary pressures for the BOE — but would add to the risk on economic growth.
