On the eve of the Chancellor’s autumn statement in 2022, David Smith, Economics Editor of The Sunday Times, shared his thoughts on the economic and business outlook.

There were three key issues David focussed on:

• Whether the recovery can continue or if a recession is now “baked in”.
• The outlook for inflation has now hit a four-decade high of 11.1%.
• How much further will interest rates rise before the Bank of England decides that it has done enough?

Is recession “baked in”?

On the first question, consumer confidence is fragile at present. GFK has been monitoring UK consumer confidence since 1974 and recent readings are close to the lowest in the survey’s history. People are gloomy about the outlook for their personal finances, as well as for the economy. Some of this may be due to disappointed expectations after the grim two years of the pandemic, but business confidence is also low.

The energy price shock, supply-chain difficulties, labour shortages for businesses, and rising interest rates have created the problem. The expected fiscal tightening to be announced by Jeremy Hunt in his Autumn Statement on 17^th November would add to the downward pressure. David cautioned against too much gloom about the outlook. Unemployment was low and vacancies high, which could help cushion the blow of the downturn. He suggested that we should look for a mild “technical” recession, perhaps closer to a flatlining economy, and a long way from the deep recession seen during the pandemic. In the Autumn Statement, the day after the webinar, the Office for Budget Responsibility (OBR), the official forecaster, predicted something similar.

A record for inflation

On the second question, on the day of the webinar the Office for National Statistics revealed a higher-than-expected 11.1% consumer price inflation rate for October, the highest for 41 years. Retail price inflation, the former main measure, surged to 14.2%. Have we reached peak inflation? Smith suggested we were at or close to the peak and that we should see a sharp fall, particularly in the second half of next year. There were three reasons for that.

We are not seeing a wage-price spiral, which would embed high inflation into the system, unlike in the past. Average earnings are rising by 6%, well below inflation, and pay settlements are running at 4%. While many employers are paying more due to recruitment and retention difficulties, this is not resulting in generalised wage inflation to match very high price rises.

A second reason is that energy price spikes tend not to last too long, and we have already seen a fall in gas prices in response to a drop in European energy consumption and the successful filling of gas storage reserves. Also, the huge quantitative easing by the Bank of England has come to an end, as has the money supply expansion it created. The result is that inflation should fall quite sharply and, unlikely as it seems now, be back to the official 2 percent target in two years’ time. The OBR, in its forecast, even predicted that we would have falling prices – deflation – by 2025.

Finally, what about interest rates? Bank Rate has risen eight times since December last year and is now at 3%, its highest for 14 years.  This is a big challenge for businesses and households, after a long period of very low rates.

When is enough for rising interest rates?

The Bank, which increased its official rate this month by 0.75 points, the biggest increase for three decades, has not finished hiking rates yet. But the end is in sight. Financial markets think Bank Rate will rise to 5% next year, though this is down from the 6% = plus peak envisaged after the so-called mini-budget on 23^rd September 2022.

5% looks too high, David suggested because the Bank does not think rates need to rise that much to bring inflation down. He suggested a peak no higher than 4%, high compared with recent years but lower than historical norms.

To watch David’s full presentation, please follow this link.

As always, a huge thank you to David for his presentation. We appreciate you taking the time to share your latest insights and answering our questions on the current UK economy. And remember, don’t forget to count the skips!