“Icy shower for UK households”

The key chart

The key message

The OBR’s latest (and slightly abbreviated) forecasts present an icy shower for UK households (HHs) and for the overall UK growth outlook.

The OBR expects real HH disposable income – one measure of living standards – to fall by a record amount (-4.3%) in FY22-23 and for two consecutive fiscal years for the first time since the GFC. The assumed 7% cumulative reduction in living standards would wipe out all of the previous eight years’ growth.

OBR economists also expect the UK to become a nation on non-savers, or nearly non-savers, throughout their forecast period.

The combination of higher prices, rising borrowing costs, falling house prices and higher unemployment will result in a peak-to-trough fall in consumption of -2.7% between 2Q22 and 3Q23. Falling consumption and investment will lead, in turn, to a recession lasting just under a year from 3Q22.

CMMP Analysis typically assesses the OBR’s forecasts within its preferred sector balances framework (see, “Good news for Rishi, but…”). We expect more details of the OBR’s assumptions regarding sector balances to be published on 24 November 2024.

More to follow…

Icy shower for UK households

The OBR expects real HH disposable income (RHDI) – one measure of living standards – to fall -4.3% in FY22-23 and -2.8% in FY23-24 (see key chart above). The decline of -4.3% would represent the largest fall since records began back in FY56-57! The -2.8% fall would represent the second largest fall!

To make matters worse, this would be only the third time that RHDI per person has fallen for two consecutive fiscal years. The last time was immediately after the GFC.

Looking further out, the forecasts assume that by FY2027-28, RHDI per person recovers to its 2021-22 level, but remains below its pre-pandemic level (see chart above).

OBR economists also expect the UK to become a nation on non-savers, or nearly non-savers, throughout their forecast period.

They forecast that the savings ratio will fall from its “very high lockdown-induced peak” of 24% in mid-2020 to a low of zero per cent in 2023 (see chart above). Beyond that, they assume that the savings ratio will settle “at around half a per cent from 2025 onwards.” This will allow some HHs to cushion the impact of inflation on consumption but will also result in higher levels of financial inequality (see “Financial inequality and debt vulnerability”).

The combination of higher prices, rising borrowing costs, falling house prices and higher unemployment will result in a peak-to-trough fall in consumption of -2.7% between 2Q22 and 3Q23 (if their forecasts are correct, see below).

The OBR revised its forecast for peak inflation from 8.7% (March 2022 forecast) to 11.1% in 4Q22 (see chart above). The current forecast represents a 40-year high for UK inflation and would have been higher still (13.6%) without the reduction in utility prices that results from the EPG.

The UK base rate is currently at its highest level (3%) since 2008 and higher than peak market expectations back in March 2022.

Current market assumptions (which underpin the OBR forecasts) indicate that the base rate will peak at around 5% in 2H23 (see chart above), 3ppt above the March 2022 forecast. Market expectations suggest that the rate falls back from 1Q24 but remains 3ppt above the OBR’s previous forecast.

The OBR expects UK house prices to fall by 9% between 4Q22 and 3Q24 (see chart above). This reflects, “significantly higher mortgage rates as well as the wider economic downturn”. OBR economists forecast that the average interest rate on the stock of outstanding mortgages peaks at 5.0% in 2H24, the highest level since 2008 and almost 2ppt above their previous forecast. Rates are forecast to fall back below 5% by the end of the forecast horizon.

UK unemployment is currently at its lowest level (3.5%) since January 1974. With vacancies remaining high and surveys indicating on-going recruitment difficulties, any rise in unemployment is likely to lag the expected fall in GDP.

The OBR forecasts that the unemployment rate will rise to 4.9% in 3Q24 (see graph above), just under 1ppt above its previous forecast. Beyond this, the OBR expects unemployment to return to its “estimated structural rate” of 4.1% by late 2027.

The OBR expects consumption to fall by 2.7% from 2Q22 to the 3Q23, before recovering in 2024 and 2025. Looking further ahead, the OBR economists assume consumption “settling at growth of around 2% a year”.

Falling consumption and investment will, in turn, lead to a recession lasting just under a year from 3Q22. GDP data for 3Q22, released after their forecast closed, showed output declining 0.2%. The OBR expects a further fall in 4Q22 and for GDP to fall by 1.4% in 2023 overall (see chart above), down from the 2022 annual growth rate of 4.2%.

CMMP Analysis typically assesses the OBR’s forecasts within its preferred sector balances framework. We expect more details of the OBR’s assumptions regarding sector balances to be published on 24 November 2024.

More to follow…

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.