Economic growth fails to lead to increase in personal income, with earnings per individual declining instead
The UK economy is projected to grow modestly in the coming years, according to various economic forecasts. Despite a contraction in the economy in April 2023 and a slight revision to the growth rate in Q1 2023, the outlook remains cautiously optimistic.
The Office for National Statistics (ONS) reported a 0.3% contraction in the UK economy in April, and the household saving rate fell from 12% in the final quarter of 2022 to 10.9% in the first quarter. However, the production sector experienced a 1.3% increase in growth during the first quarter, and the UK saw the fastest economic growth in the G7 in the opening quarter of this year.
The Office for Budget Responsibility (OBR) and Capital Economics expect the UK's growth to be 1% for the year, while the Confederation of British Industry (CBI) forecasts GDP growth of about 1.2% in 2023 and 1.0% in 2024. Vanguard’s outlook is similar, expecting around 1% GDP growth in both 2023 and 2024.
Consumer spending is expected to be the main driver of growth, with real income gains and lower interest rates buoying household spending. However, higher labor costs and global uncertainties are expected to weigh on business investment. Inflationary pressures and risks persist, and the Bank of England is expected to maintain a gradually easing monetary policy stance to support this moderate growth outlook.
The services sector grew by 0.7% and the construction sector grew by 0.3% in the first quarter, according to the ONS. However, some economic indicators, such as retail sales, have shown signs of weakness, leading economists to question whether this is a one-off or the start of a new trend.
The World Bank has warned of the global economy suffering its worst fate since the financial crash in 2008, and Ruth Gregory, deputy chief UK economist, has warned of the waning underlying momentum in the economy. Despite these challenges, some economic indicators, like retail sales, are outperforming expectations, and government spending is expected to provide near-term support.
In a positive development, real wages have grown more than they did in the entire decade after 2010, and living standards are up 1.2% compared to the 0.4% rise seen over the whole 2019-2024 parliament. However, the Chancellor's £20bn tax raid on employers in the Autumn Budget has been found to burden firms with extra costs and squeeze profits by economists.
In summary, the UK economy is forecast to grow modestly in the coming years, with contributions from consumer spending, but risks from inflationary pressures, higher labor costs, and global uncertainties persist. The Bank of England is expected to maintain a gradually easing monetary policy stance, supporting this moderate growth outlook through 2023 and 2024.
The UK's growth outlook might be bolstered by financial institutions, as various forecasters such as the Office for Budget Responsibility, Capital Economics, Vanguard, and the Confederation of British Industry, expect the UK's GDP growth to be around 1% for 2023. However, business investment could be hampered by higher labor costs and global uncertainties, underlining the importance of insurance and finance industries in mitigating these risks.
