National Institute UK Economic Outlook Spring 2023

Despite recent positive news, we still think GDP growth will remain close to zero in 2023 and that GDP will grow only slowly in 2024. UK inflation remains in double-digit territory and core inflation remains high. Inflation is forecast to fall in 2023, but not as quickly as the external consensus forecasts. We do not expect it to return to target until late 2025. This creates a dilemma for the Monetary Policy Committee. Real personal disposable income saw a very slight improvement in the last quarter of 2022, the first time in four quarters. But, this is likely to be short lived, and we now forecast real household personal disposable income to fall in 2023. This will be contingent on the rate at which inflation slows and the level of pay increases. Despite higher interest rates, there has been a significant increase in business and consumer confidence across a range of survey and sentiment indicators. This may seem surprising against a backdrop of increasing interest rates and high inflation. However, it may be better to characterise this reported increase in confidence as a collective sense amongst business and consumers that, perhaps, the worst of the energy price shock is behind us. The labour supply shortage and the chronic investment deficit remain. We feel the budget measures were a step in the right direction but insufficient to deliver the needed structural changes to encourage a return of stronger productivity growth to the UK economy.