Economics and fiscal outlook report, March 2022

Date : 24 March 2022

The Office for Budget Responsibility (OBR), the government’s official forecasting body, has issued a new Economic & Fiscal Outlook (EFO) report – the Chancellor’s Spring Statement is based on these forecasts.

From an economic viewpoint, the March EFO is downbeat compared to the update received in October 2021. Inflationary pressure, exacerbated by the war in Ukraine, will materially impact UK and global growth over 2022/23.

Inflation is now expected to peak in late 2022, at 8.7%, this would be the highest level in 40 years. Such extraordinary levels of inflation are to lead to the largest fall in living standards since records began, real disposable incomes are scheduled to fall by 2.2% to March 2023.

The fiscal situation is slightly more upbeat, public finances have recovered quicker than expected following the impact of the pandemic. Borrowing over the year was £51bn lower than forecast in October 2021, with the vast majority of this down to increased tax receipts.

The OBR highlights considerable risks to this economic forecast, suggesting that due to the war in Ukraine ‘there is unusually high uncertainty around this outlook’.

A summary of the key points is included below:

Economic outlook

  • (Para 1.1) The war in Ukraine has had major repercussions for the global economy. These concerns have exacerbated UK economic issues (e.g. Omicron, supply bottlenecks and rising inflation).
  • (Para 1.1) Global growth for 2022/23 has been slashed by 1% down to 3.9%.
  • (Para 1.2) The UK is a net energy importer, and it is therefore significantly exposed to energy price shocks in global markets.
    • The OBR have forecast that domestic energy prices are set to rise a further 40% in October to around £2800 for the average household. This is a 120% increase on the previous year.
  • (Para 1.2) CPI Inflation is forecast to peak at 8.7% in Q4 2022, the highest level in 40 years.
  • (para 1.12) CPI Inflation is expected to average 7.4% over the year.
  • (Para 1.12) To combat this, it is expected that the Bank of England will slowly increase the base rate to 1.9% by third quarter of 2023.
  • (Para 1.2) High levels of inflation will erode real wages, cutting consumer spending and growth. The UK GDP growth forecast for 2022/23 was slashed from 6% to 3.8%.
  • (Para 1.2) Real disposable incomes are to fall by 2.2% over 2022/23. This is the largest financial year fall since records began.
  • (Para 1.9) The UK labour market remains strong, with unemployment at 3.9%, compared to the forecast of 5% in October. Total employment remains lower (450,000) than prior to the pandemic, in part due to poor labour market participation from the older population, an issue raised in previous studies.
  • (Para 1.15) ‘Economic scarring’, the difference between pre-COVID forecasts and these forecasts, is maintained at around 2% of GDP
  • (Box 2.1) Global mismatches of supply and demand are having significant impacts on commodity markets and supply chains
    • E.g., Car production is down between 15% and 65% globally due to lack of semiconductor supplies
    • Persistence of bottlenecks will likely depend on the length of time that elevated global consumer demand exists. Elevated demand is expected to slow as inflation takes hold globally.

Fiscal outlook

  • (Para 1.3) The public finances are recovering quicker than expected from the impact of COVID-19.
  • (Para 1.4) Borrowing has fallen from 15% of GDP over 2020-21 to 5.4% of GDP over 2021-22. Borrowing is forecast to increase by £16bn in 2022-23, due to debt interest payments and the short-term energy rebate announced in February. This increase in borrowing is expected to be transitory
  • (Para 1.5) Forecasts for tax receipts to the government to 2025 have increased by £37bn. This has provided the Chancellor with around £20bn of fiscal headroom to manoeuvre, that may be used in the Autumn budget.

Risks to the forecasts

  • (Para 2.1) There exists incredibly high uncertainty around the impacts of Ukraine and international sanctions on the UK economy.
  • (Para 2.11) Energy prices could rise further than the OBR forecast predicts.
    • The forecast was made based on an oil price peak of $100 barrel. Prices have already peaked at $130 per barrel. Gas prices have also peaked significantly since the forecast had been made. This is a material risk to the inflation figures forecast above.
  • (Box 2.2) No account of the impact of inflation on wider commodities has been included in this forecast (e.g. wheat prices).
    • Year on Year wheat in March 2022 had risen 40%, this is likely to push inflation up higher than the forecast above.
  • (Para 1.7) A vaccine escaping variant may lead to a sharp GDP contraction. The recent rise in COVID-19 hospitalisations across the UK demonstrates the risk COVID still poses.

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