Inflation will undermine years of rising living standards, resulting in a decade of stagnant wage growth for British families.
According to the government’s budget watchdog, rising prices over the next two years will fully nullify wage increases accrued over the previous eight.
The 7 percent decline in living standards will be the largest since records began in the 1950s, causing a recession that began in the third quarter of this year and affecting consumption.
The recession will persist for slightly over a year, according to the Office for Budget Responsibility (OBR), reducing the size of the economy by 2%.
And as companies feel the pinch, they will begin to eliminate positions. In the third quarter of 2024, the unemployment rate is projected to jump from its current level of 3.6% to 4.9%, leaving 505,000 people out of work.
Thomas Pugh, an economist with the accounting firm RSM, stated, “The OBR’s projections for the economy over the next two years portray a bleak picture, with a year-long recession and a record-breaking decline in real household earnings.”
Paul Johnson, director of the Institute for Fiscal Studies, stated, “The outlook for living standards over the next two years is bleak.”
In an effort to plug the yawning shortfall in the public coffers, the Chancellor unveiled a slew of hidden levies. The British tax burden will soon reach its greatest sustained level since the end of World War II.
Mr. Hunt acknowledged that “families, pensioners, businesses, teachers, and nurses are anxious about the future in the face of unprecedented global headwinds.”
However, he stated that his efforts to bolster Treasury coffers would result in a “less severe recession” and were necessary to “instill confidence in our ability to pay our debts” abroad.
In the 2022/23 fiscal year, households’ real disposable income – the amount of cash they have to spend after taxes and adjusting for inflation – will decline by 4.3%, according to the Office for Budget Responsibility.
By April 2024, the disposable income of households will be at its lowest level since 2014.
The standard of living will not return to last year’s level until 2027/28, and even then it will be more than 1% below pre-pandemic levels.
Despite the fact that wages have increased on average over the past two years as a result of post-pandemic recruitment efforts, all of these increases and more have been eroded by the soaring cost of living.
This week’s data revealed that inflation reached 11.1% last month, a 41-year high that exceeded expectations.
The annual inflation rate will average 9.1% for the entire year. Next year, it will remain high for the first half of the year before plummeting to an annual average of 7.4%.
Gross domestic product (GDP) will decline in the near future as a result of the squeeze on households.
Mr. Hunt stated, “Inflation is high in the United States, but it is higher in Germany, the Netherlands, and Italy.” Here, interest rates have increased, but more so in the United States, Canada, and New Zealand. In this country, growth forecasts have declined, but in Germany, they have declined even more.
The OBR’s economic forecasts were slightly more optimistic than those issued by the Bank of England last month, based on the assumption that households will stop saving as the recession worsens and instead spend freely.
David Miles of the Office for Budget Responsibility (OBR) stated, “The household savings rate in the United Kingdom will fall dramatically, perhaps to near zero, after being exceptionally high in 2020 and 2021 during lockdowns.”
We believe that those who are in a position to do so will likely tap their excess savings from that time period. Thus, our forecast for consumer spending is somewhat more optimistic than the Bank of England’s.