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UK economy set to shrink but avoid recession UK faces biggest fall in spending power for 70 years
(40 minutes later)
The UK is expected to avoid a technical recession in 2023, Jeremy Hunt tells the Commons.The UK is expected to avoid a technical recession in 2023, Jeremy Hunt tells the Commons.
The UK is expected to avoid a technical recession in 2023, Jeremy Hunt tells the Commons.The UK is expected to avoid a technical recession in 2023, Jeremy Hunt tells the Commons.
The UK economy will avoid a recession this year although it is still expected to shrink, according to the chancellor. The UK faces its biggest fall in spending power for 70 years as the surging cost of living eats into people's wages.
The government's independent forecaster thinks the economy will contract by 0.2% this year. The government's independent forecaster said that household incomes - once rising prices were taken into account - would drop by 6% this year and next.
Inflation - the rate at which prices rise - is expected to more than halve to 2.9% by the end of this year, the Office for Budget Responsibility said. Living standards won't recover to pre-pandemic levels until 2027, it warned.
But Labour criticised the announcements made during the Budget as "dressing up stagnation as stability". It came as Chancellor Jeremy Hunt said the economy would shrink this year but avoid recession.
The Office for Budget Responsibility (OBR) predicted that real household disposal income per person will fall by 6% this financial year and next. Energy and food bills have shot up due to the war in Ukraine and pandemic, and are squeezing household budgets.
This would represent "the largest two-year fall in living standards since records began in the 1950s," said OBR chairman Richard Hughes. Inflation - the rate at which prices are rising - is currently in double digits.
"We think households are going to dip into some of their savings to help manage the squeeze on living standards and that supports growth in the near term," he added.
The OBR warned living standards would not recover to pre-pandemic levels until at least 2027. 
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It is set to more than halve to 2.9% by the end of this year, according to the Office for Budget Responsibility (OBR). But for now, the figure remains very high, and well ahead of average wages.
The drop in real household disposable income would represent "the largest two-year fall in living standards since records began in the 1950s," Richard Hughes, chairman of the OBR, said.
"We think households are going to dip into some of their savings to help manage the squeeze on living standards and that supports growth in the near term,"he added.
The OBR looks at the government's tax and spending plans in the Budget and then predicts how the country will perform over the next five years.The OBR looks at the government's tax and spending plans in the Budget and then predicts how the country will perform over the next five years.
Previously it had forecast that the UK would enter a recession in 2022 and shrink by 1.4% in 2023. Previously it had expected the UK to fall into recession at the end of last year and continue to shrink all of this year.
But it has now revised this year's forecast to a 0.2% contraction and does not expect the UK to fall into a recession, which is defined as two three-month periods of economic decline in a row.. A recession is usually defined as when an economy gets smaller for two three-month periods - or quarters - in a row.
The OBR then predicts the economy will grow by 1.8% in 2024, 2.5% in 2025 and 2.1% in 2026. The last time the UK's economy went into recession was in 2020, at the height of the coronavirus pandemic.
The OBR now expects:
The economy to contract by 0.2% this year but avoid a recession
It will then grow by 1.8% in 2024, 2.5% in 2025 and 2.1% in 2026
Chancellor Jeremy Hunt said the predictions from the OBR were "proving the doubters wrong".
But Labour criticised the announcements made during the Budget as "dressing up stagnation as stability".
'Out of touch''Out of touch'
Independent research group the Institute for Fiscal Studies (IFS) said the economic picture had not changed "enormously since the autumn".Independent research group the Institute for Fiscal Studies (IFS) said the economic picture had not changed "enormously since the autumn".
IFS director Paul Johnson said the OBR "expects the economy to grow a bit faster in the short-term, and a bit slower in the medium-term".IFS director Paul Johnson said the OBR "expects the economy to grow a bit faster in the short-term, and a bit slower in the medium-term".
This would combine to create an economy that was "0.6% larger in real-terms in 2027-28 than under the autumn forecast," he said.This would combine to create an economy that was "0.6% larger in real-terms in 2027-28 than under the autumn forecast," he said.
Chancellor Jeremy Hunt said the prediction from the OBR was "proving the doubters wrong". Meanwhile, Labour leader Sir Keir Starmer accused the government of being "out of touch" and putting the country "on a path of managed decline".
But Labour leader Sir Keir Starmer accused the government of being "out of touch" and putting the country "on a path of managed decline". The chancellor also said the UK was on track to meet the government's self-imposed spending rules.
According to these rules, government debt must be falling as a percentage of growth in five years' time.
How can we avoid a recession and still shrink?How can we avoid a recession and still shrink?
The chancellor has announced that the economy will avoid a "technical recession" this year, but that doesn't mean we're out of the woods.The chancellor has announced that the economy will avoid a "technical recession" this year, but that doesn't mean we're out of the woods.
The size of the economy - the value of everything we make and produce this year - is set to fall by about 0.2% according to the chancellor's figures.The size of the economy - the value of everything we make and produce this year - is set to fall by about 0.2% according to the chancellor's figures.
It becomes a "technical recession" if the economy shrinks for two seasons (three-month periods) in a row. So it's possible to avoid the technical definition even if the economy is doing badly if it shrinks in the spring and autumn but rises in the summer.It becomes a "technical recession" if the economy shrinks for two seasons (three-month periods) in a row. So it's possible to avoid the technical definition even if the economy is doing badly if it shrinks in the spring and autumn but rises in the summer.
A forecast of a 0.2% shrinkage may be better than we thought last autumn (shrinking by 1.4%) but it's hardly anyone's definition of doing well.A forecast of a 0.2% shrinkage may be better than we thought last autumn (shrinking by 1.4%) but it's hardly anyone's definition of doing well.
The chancellor also said the UK was on track to meet the government's self-imposed fiscal rules.
According to these rules, government debt must be falling as a percentage of economic output in five years' time and the budget deficit must be below 3% of gross domestic product over the same time period.
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