The United Kingdom's economic outlook appears grim, as the economy is forecast to grow by only 0.75% this year, which is half the rate predicted in November. Despite narrowly avoiding a technical recession, the economy has stalled since March, with risks of minimal growth persisting into the year. Inflation is anticipated to "rise quite sharply" into the autumn, approaching nearly 4%, largely due to increased gas prices following a harsh winter.
Recent data points to a surge in unemployment rates over the next two years, projected to rise just below 5%. The Bank of England's interactions with businesses reveal growing concerns about the Budget's impact on investment. Many firms have "mentioned the Budget as a deterrent to investment," specifically citing business asset relief, inheritance tax, and National Insurance as key factors.
In response to these challenges, the Bank of England is contemplating a significant half a percentage point cut in interest rates. However, it emphasizes that it will proceed "careful" with such cuts amidst the prevailing uncertainty surrounding international trade policies, particularly those influenced by President Trump's administration. Notably, today's subdued economic forecast did not account for potential US tariff policies.
The UK's economic stagnation is expected to extend into the early part of this year. The economy's productivity has been adversely impacted by numerous factors including sickness, the pandemic, and Brexit. These issues have collectively weakened the long-term vitality of the economy according to the Bank's assessments. The situation reflects a classic case of "zero growth and high and rising inflation," often described as 'stagflation.'
The looming rise in inflation is driven primarily by the need to replenish depleted gas storage facilities after an unusually cold winter. This factor, combined with Brexit-related uncertainties and global trade tensions, continues to pose significant challenges for the UK's economic recovery.