No stiff upper lip from Bank of England

The worst possible time for a campaign to be Britain’s next Prime Minister as the Bank of England warned the country is facing a lengthy recession in 2023 and the nastiest fall in living standards for a generation or more.

Inflation is forecast to reach 13% a year by October – then slump to 2% by 2025 as the economy slides into a nasty recession where growth is forecast to fall by 2.1 percentage points from peak to trough, with the average fall in GDP of 1.5 percentage points through the slowdown.

In fact the forecast strongly suggests there will be no growth for the next two perhaps three years – which in turn strongly suggests rising unemployment, rising government spending on benefits and very weak corporate investment and profits.

UK share prices will be weak and for some sectors, such as food retailing and media, revenue gains and earnings will be hard to find in that time.

The most astounding part of the latest forecast was that consumer inflation would hit 13% in two months – which would ensure that millions of Britons will not be able to afford Christmas and face the prospect of losing their jobs next year.

The bank forecast that the post-tax income of households would fall in real terms in both 2022 and 2023, even after factoring in the £21 billion cost of living package announced by the British government in May.

The peak-to-trough decline of more than 5% in household income would be the worst on record, with data stretching back to 1964 when the information was first collected.

The forecasts say Britain is now facing a much bleaker economic outlook than either the United States, Europe, Canada, NZ or Australia. All are facing a slowing pace of activity next year, only the UK is looking at a slump into a recession.

The 50-basis-point increase saw the BoE join other central banks such as those in Australia and NZ in lifting rates half a per cent. The US Fed has used two 0.75% rises (and before than an increase of 0.50%) and the Bank of Canada has trotted out a 1% rise.

Officials expect the slowdown to begin in the fourth quarter of this year, and continue until the end of 2023. The peak-to-trough fall in output will be an estimated 2.1% – a shallow but lengthy slowdown that won’t be the stagflation feared in earlier forecasts, but a full blown recession.

While the slump will be similar to the one in the early 1990s (at the end of the Thatcher governments) it will not – on present figuring, be as deep as the slump in the GFC in 2008-09 or in the first wave of the pandemic in 2020.

The surge in consumer price inflation would trigger the slide, peaking at an estimated annual rate of 13.3% in October – the highest in 42 years. UK inflation hit an annual rate of 9.4% in June which was shocking, but the latest forecast is even more amazing – it is up from previous forecasts for a peak of 11%.

As a result real wages and household income will slump, consumer spending will slump and tax revenues will slump and the budget deficit will balloon.

Economists say the slump in incomes would be the largest since record started in 1964 (and top the 1976 recession which saw Britain go broke and the IMF called in to provide $US4 billion in aid).

The previous forecast from the BoE said there would be no economic growth until 2025 at the earliest – which was described as stagflation. Now that has been replaced by a recession forecast.

In the new forecasts, the BoE sees inflation falling back to 2% in two years’ time as the slump in demand and in growth drags the economy into a recession.

The BoE stressed on Thursday that there were “extremely large” uncertainties about the economy – which could make the slowdown more or less severe than its core forecasts.

“Policy is not on a pre-set path,” the BoE said. “The scale, pace and timing of any further changes in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”