The UK is headed for deeper economic misery, following a horror show of economic forecasts from the Bank of England yesterday. Britain faces a bleak outlook — heading into a recession this winter that will last more than a year, with inflation hovering above 13%. Unemployment will rise and households will face a historic squeeze on living standards following the sharp jump in gas prices, the BoE said. The economic cost of Vladimir Putin’s invasion of Ukraine has risen, on top of an economy already battered by the pandemic, and adjusting to the reality of Brexit. The Bank’s grim warning came alongside its biggest rate hike in 27 years on Thursday, as its policymakers desperately try to control inflation (now 9.4% and heading higher). Jack Leslie and James Smith of the Resolution Foundation analyzed the Bank’s monetary policy report and say its forecasts are “disastrous” for living standards. They warn: Despite the government spending more than £30bn on support, the Bank predicts the economy will fall into recession later this year, shrinking for six consecutive quarters and not regaining its pre-pandemic level within the period forecast (end mid-2025). Inflation is now forecast to peak higher – at an impressive 13.3% in October – and high inflation will now be with us for longer. All of this is devastating to living standards: the Bank now expects real household disposable income to fall by around 3.7% over 2022 and 2023 – the biggest such fall on record. To pile misery on families, the Bank predicts unemployment will rise by around 900,000 people. the Bank considers this to be sufficient to prevent inflation from consolidating. What do today’s @bankofengland announcements mean for households? Average real household income after tax is expected to fall by around £2,000 over this year and next. The government will inevitably need to do more to protect families from the worst effects of this crisis. pic.twitter.com/NN1AxQ5152 — Resolution Foundation (@resfoundation) August 4, 2022 But the big news is the Bank’s bleak outlook for this winter, with inflation forecast to peak at 13.3% in October – higher than previously thought. In addition, this high inflation is also expected to last longer, reflecting higher gas prices. pic.twitter.com/mQeQmQ2NCv — Resolution Foundation (@resfoundation) August 4, 2022 A weaker economy is projected to push the unemployment rate up from the current level of 3.8% to over 6%. This, combined with higher and longer-term inflation, means real household disposable income could fall by 3.7% in 2022 and 2023. pic.twitter.com/hmvD99wtJT — Resolution Foundation (@resfoundation) August 4, 2022 Rising energy prices will lead families and businesses to cut spending on other items, with higher prices overall meaning spending won’t go as far. This leads to a significantly weaker outlook for the economy – hence the Bank expects a recession in the fourth quarter of this year. pic.twitter.com/5DfOS77jKN — Resolution Foundation (@resfoundation) August 4, 2022 Leslie and Smith say there is no quick fix to rising energy costs. So the next Prime Minister must do more to protect families from the worst effects of the crisis, with a focus on low- to middle-income households. All this reveals the challenges for the next Prime Minister: while they may long for a honeymoon period, the reality is that the deepening economic crisis will be at the top of their to-do list – and in particular providing support which will focus on low- and middle-income households – when they enter 10 Downing Street on September 5.
Also coming today
The latest US jobs report is due later, showing the health of America’s labor market as its economy slows. Economists forecast that job creation slowed in July to 250,000 from 372,000 in June.
THE AGENDA
7 am BST: Halifax House Price Index for July 13:30 BST: US jobs report for July
Important events BETA filters Key Events (6) United Kingdom (7) Bank of England (6) BoE (4) Andrew Bailey (3) Today’s Program (3)
Bailey: Open to discussions with the government about how the regime works
The Today Program is now playing his interview with Bank of England Governor Andrew Bailey. Asked about the political storm surrounding the BoE’s handling of the crisis, Bailey says the central bank’s independence is “critical” but its job is to get inflation back on target. Bailey insists he plans to serve out his eight-year term as governor. Q: Would changes to your current terms of independence be detrimental or are you open to change? Bailey replies that he doesn’t see much desire to challenge the central bank’s independence, but is more than happy to discuss the details of the current regime. He rejects claims that the Bank is not accountable – it is accountable to parliament and regularly reports to MPs. Bailey also points out that the government sets the Bank’s target for price stability (currently 2% inflation). I am open to any discussions with the government about how they think the regime should work, Bailey adds.
UK house prices fall for the first time in a year
Mark Sweney UK house prices fell for the first time in more than a year in July as the country’s biggest lender warned of the impact of higher interest rates and the wider cost of living crisis. The average house price was £293,221 last month, down 0.1% month-on-month, the first decline since June last year, according to the latest report from Halifax. The marginal drop reduced the annual growth rate from 12.5% to 11.8%, although overall house prices remain £30,000 higher than at the same time last year. Russell Galley, chief executive of Halifax, says households are being squeezed by rising borrowing costs: “While we shouldn’t read too much into any month, especially as the decline is only fractional, a slowdown in annual house price growth has been expected for some time. “Leading housing market indicators have recently shown a softening of activity, while rising borrowing costs are adding to the squeeze on household budgets.” Here’s the full story: Here’s some reaction: House prices fell 0.1% in July, @HalifaxBank says. “A slowdown in annual house price inflation still seems the most likely scenario,” he says. But prices rose by 11.8% over the year, a rise of more than £30,000. That’s still a rise of £82 a day pic.twitter.com /bz4g24jKS8 — simon read (@simonnread) August 5, 2022 AVG UK house prices fell 0.1% in July. Is this the start of a gradual descent or a summer break? A typical UK property now costs £293,221, down £365 on the previous month. Those looking to sell may have more incentive to do so with this first cold @HalifaxBank HPI pic.twitter.com/Km5FQR1zYC — Emma Fildes (@emmafildes) August 5, 2022
IFS: The next prime minister must find billions in new support
Britain’s next prime minister must find billions of pounds worth of support for households and public services, said Paul Johnson, director of the Institute for Fiscal Studies. Speaking on BBC Radio 4’s Today show about the Bank of England’s forecasts, Johnson warned that the Tory leadership debate was not focusing on the challenges facing the public finances. Johnson said high inflation could give a short-term boost to tax revenue (from higher wages and prices). But what I find remarkable about the Conservative leadership debate is that they don’t seem to be talking about things that will actually need public finance. “The first is, of course, that they will have to find many more billions to support households. I mean, this is a much bigger increase in energy bills than was expected even a few months ago when the stimulus packages were announced, and it’s not going to be helped by the tax cuts being discussed. Johnson also warns that some struggling public services face “potentially large real-terms cuts” “Secondly, of course, there will need to be more money for public services – health service training and so on. The increases that took place this year and were announced a year ago seem very small because this was done with the expectation that inflation would be 3-4%. Labor MP Barry Shearman tweeted: Paul Johnson more reasonable and logical than any available cabinet minister @BBCr4today — Barry Sheerman MP (@BarrySheerman) August 5, 2022 The UK is facing “a juggernaut” that will crush family finances, Labour’s shadow work and pensions secretary, Jonathan Ashworth, has warned. Ashworth told the Today Program that households need more support to cope with rising energy bills: “There will be families and retirees across the country waking up this morning reading the news who are absolutely terrified that a jihadist is headed his way that will crush family finances. So action is needed. We have time to plan. “The package announced to support families to tackle their energy bills is clearly not enough when we are talking about energy bills of more than £4,000, almost half of the full state pension. “So we’d cut VAT on energy bills, we wouldn’t give £4bn worth of tax breaks to gas and oil companies like the government is doing, we’d refurbish homes.”
‘The big squeeze’: what the papers are saying about the Bank of England recession forecast
Today’s UK papers are dominated by the Bank of England’s prediction that the UK is headed for a long recession: The Financial Times does well with a “red alert” graphic showing GDP and inflation alongside an image…