UK outlook brighter as recession, living cost fears recede

LONDON: The gloom cloaking the UK economy is starting to lift, giving another potential boost to Prime Minister Rishi Sunak.

Just four months ago, the Bank of England (BoE) warned that Britain was facing its longest recession in a century and a collapse in living standards.

Neither is the case any longer. The BoE this week effectively cancelled the recession and said the period of falling household incomes is over. That points to a stronger backdrop for Sunak and the Conservatives in the year or so leading up to the next election.

“The prospects for the economy in terms of growth are now considerably better, and I think it is reasonable to say there is a pretty strong likelihood that we will avoid a recession this year,” BoE governor Andrew Bailey told the BBC.

Sunak must call an election by early 2025 and has been trailing the opposition Labour Party in polls since he took office in October. That gap has narrowed as Sunak’s government stopped the turmoil that brought down his predecessor, Liz Truss.

Stronger growth and lower inflation would help Sunak, who made helping people weather the cost-of-living crisis one of his key priorities.

Britain alone in the Group of Seven has yet to regain its pre-pandemic level of output, and wages are falling further behind inflation. It also would help the Treasury’s finances.

Most measures of UK economic prospects are improving. Alongside its quarter-point hike in interest rates to 4.25% last Thursday, the BoE upgraded its growth forecast for the three months to June to show gross domestic product increasing “slightly” instead of contracting 0.4%.

Employment is forecast to grow 0.2% in the second quarter, not drop 0.4% as predicted in February.

Real household disposable incomes could “remain broadly flat in the near term, rather than falling significantly,” the minutes to last week’s Monetary Policy Committee rate meeting said.

Those figures suggest that households will soon feel better off, despite the current 10.4% level of inflation.

Past growth has also proved stronger than projected. In November, output was forecast to shrink 0.3% in the final quarter of 2022. Instead, it flatlined.

Private-sector activity, as measured by the purchasing managers’ index, is positive, with order books growing and confidence at its highest level since the invasion of Ukraine 13 months ago. — Bloomberg

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